Preamble

The House met at half-past Two o'clock

PRAYERS

[Mr. SPEAKER in the Chair]

PRIVATE BUSINESS

GREATER LONDON COUNCIL (GENERAL POWERS) (No. 2) BILL

Order for consideration of Lords Amendments read.

Hon. Members: Object.

Lords Amendments to be considered tomorrow.

STOCKPORT CORPORATION BILL

Read the Third time and passed.

LANCASHIRE COUNTY COUNCIL (GENERAL POWERS) BILL [Lords]

SOUTHAMPTON CORPORATION (SOUTHAMPTON COMMON) BILL [Lords]

Bills read a Second time and committed.

GREATER LONDON COUNCIL (MONEY) BILL (By Order)

Order for Second Reading read.

Hon. Members: Object.

Bill to be read a Second time upon Thursday next.

Oral Answers to Questions — NATIONAL FINANCE

Ice Cream (Purchase Tax)

Mrs. Sally Oppenheim: asked the Chancellor of the Exchequer, if he will consider abolishing or reducing purchase tax on ice cream.

The Financial Secretary to the Treasury (Mr. Patrick Jenkin): I have nothing to add to my right hon. Friend's Budget Statement.

Mrs. Oppenheim: I am aware of that disappointing state of affairs. Does not my hon. Friend agree that the tax is largely anomalous, because ice cream is not a luxury but a nourishing food, widely advocated by dieticians, used throughout the hospital service, and a useful supplement to the family menu? Does not he concede that the abolition of the tax on ice cream would result not only in expansion in the ice cream industry and increased employment in it but in a reduction of the price of a popular family food?

Mr. Jenkin: I am aware that my hon. Friend has one of Britain's largest ice cream factories in her constituency. She will be delighted to learn that the average rate of growth of production of ice cream in the past four years has been about 5½ per cent. per annum, which hardly suggests that the purchase tax on it is acting as a deterrent to the expansion of production of that very atractive product.

Mr. Clinton Davis: How much "lolly" for the Treasury is there in ice cream?

Mr. Jenkin: That was not very good. Ice cream forms the major part of Group 28 of the purchase tax Schedule, of which the revenue in 1970–71 was about £12 million.

Beer

Dr. Gilbert: asked the Chancellor of the Exchequer how much excise duty was paid on beer in 1970 and how much he assesses will be paid in 1971 on the basis that gravities were in the same proportions to the total amounts liable for duty in 1970 and in 1950, respectively.

The Chief Secretary to the Treasury (Mr. Maurice Macmillan): Duty receipts from beer produced in the United Kingdom were £436 million in 1970 and at unchanged average gravity would probably be about £450 million in 1971. If the average gravity were to fall to the 1950 level, receipts would be reduced by nearly £10 million per year.

Dr. Gilbert: I did not ask the hon. Gentleman anything about average gravity. That is the point. We should like to know exactly how average gravity is calculated and whether the gravities were in the same proportion to the total amounts. Does the hon. Gentleman have that information, which would be very different?

Mr. Macmillan: In 1950 the average gravity of home-produced beer was 1036.24 degrees. In 1970 it was 1036.87. Beer gravities have changed remarkably little since the early days of the war.

Mr. Ashton: asked the Chancellor of the Exchequer whether he will seek to change the basis of taxation on beer from its strength to its volume.

Mr. Maurice Macmillan: No, Sir.

Mr. Ashton: Is the hon. Gentleman not aware that under the present system of taxation there is a great incentive for a brewer to water the beer? Does he not agree that while it would cost nothing extra to make it of a higher strength, the brewers, if they did so, would have to pay more tax? Would not a value-added tax on beer on volume be a far better way from everyone's point of view?

Mr. Macmillan: The question of value-added tax on beer is one for discussion and decision in common with other V.A.T. questions. As to the question of altering the basis of taxation, the difficulty with a flat-rate increase regardless of strength would be that it would tend to put up the price of cheaper beer and to bring down the price of the more expensive beers. I am not sure that that is what the hon. Gentleman is trying to do.

Mr. Biggs-Davison: Does Watney's Red Revolution mean a watering of the workers' beer?

Mr. Rhodes: Is the hon. Gentleman aware that every time the gravity of a

particular beer declines—and there is abundant evidence that this is happening—a company then saves taxation which it would have to pay to the Government but fails to pass this saving on to the consumer, thereby deceiving the beer-drinking public?

Mr. Macmillan: The hon. Member is under a slight misapprehension. The gravity has been fairly consistent since the war. In 1949–50 it had fallen to 1,033·71 degrees, but it rose to 1,036·51 degrees in 1950–51. In 1960–61 it was 1,037·25 degrees, and in 1970–71 it is provisionally put at 1,036·66 degrees. Gravities have been constant for some time.

Census Information

Mr. Leslie Huckfield: asked the Chancellor of the Exchequer what amount and detail of 1966 Census information has been obtained and employed by the Inland Revenue services; and to what uses such data were put.

Mr. Patrick Jenkin: The Statistics and Intelligence Division of the Inland Revenue obtains a considerable amount of statistical information from the Registrar-General's Office, but always within the rules governing the confidentiality of the Registrar-General's figures.

Mr. Huckfield: That is the answer I expected.

Mr. Speaker: Order. I do not think that the House can tolerate comments on the Minister's answer. Hon. Members must ask a supplementary question. That is the second time today we have had a comment.

Mr. Huckfield: Is the hon. Gentleman aware that that is the answer I expected? Is he also aware that certain categories of information may have been obtained by the Inland Revenue which were not normally obtainable by other Government Departments? What precise safeguards were put on the confidentiality of that kind of information?

Mr. Jenkin: The Inland Revenue gets no more information from the Registrar-General than is available not only to other Government Departments but to anyone outside the Government—the details of particular population areas and so on. Perhaps the hon. Gentleman was


misled by the headline to an article in The Guardian a few weeks ago. I do not criticise the article. It was accurate and restrained. But the headline used the words "secrets", which was misleading and some may have thought mischievous.

Unemployment

Mr. Ashley: asked the Chancellor of the Exchequer what measures he now proposes to take to reduce the level of unemployment.

The Chancellor of the Exchequer (Mr. Anthony Barber): I would refer the hon. Member to the reply I gave to the hon. Member for Heywood and Royton (Mr. Barnett) on Tuesday, 27th April.—[Vol. 816, c. 211.]

Mr. Ashley: Is the right hon. Gentleman aware that the success of other countries in maintaining a high level of employment together with a high level of wages has torpedoed his efforts to condemn British trade unions as being responsible for unemployment? Will the Government now accept responsibility for unemployment and take urgent steps to deal with it?

Mr. Barber: The level of real wages which a country can enjoy depends on a number of factors, in particular the level of productivity. The fact is that recently the growth of money wages in this country has far outstripped any conceivable increase in productivity, with damaging effects on prices, employment and our international competitive position. It is our objective to raise the level of productivity by means of the reforms we are introducing in taxation, public expenditure and industrial relations.

Mr. Tavente: Do not the very disturbing figures for industrial production, which have just been published, show that the base on which the Budget judgment was made was wrong? In view of the amount of slack which evidently exists in the economy, is it not a mistake to suppose that increasing the pressure of demand to take up that slack will add demand inflation to cost inflation?

Mr. Barber: No, Sir. I do not draw the same conclusion as the hon. and learned Gentleman. The Financial Statement and Budget Report forecast a fall of output between the second half

of 1970 and the first half of 1971, but an increase of just over 3 per cent. was forecast to follow between the first halves of 1971 and 1972. I am confident that a recovery in output will take place as the Budget and our other measures progressively take effect.

Income Tax and Social Security Systems (Integration)

Sir B. Rhys Williams: asked the Chancellor of the Exchequer if he will now publish a White Paper on the integration of the income tax and social security systems.

Mr. Maurice Macmillan: No, Sir.

Sir B. Rhys Williams: Is my hon. Friend aware that a number of hon. Members on both sides are disappointed by the apparently slow progress of the Government's studies of negative income tax and similar systems of integrated taxation and social security? Is it not particularly foolish when we are in process of enacting the National Insurance Bill, which is to introduce the earnings-related contribution to national insurance, to try to pretend that this is not just a social security tax?

Mr. Macmillan: I think that my hon. Friend will agree that it would be even more foolish if we were to act prematurely. We are conducting a close examination of these complicated questions and the results so far show that a good deal of work must still be done, particularly on the whole question of child poverty. It would be wrong to attempt to act or even to publish a Green or White Paper until we are a little further advanced in our studies.

Mr. Leslie Huckfield: Does not the hon. Gentleman agree that there are significant risks to the degree of confidentiality that can be preserved in the integration of such data? Can he give an assurance that the House will have a full opportunity of discussing this matter before any definite proposal is made?

Mr. Macmillan: The hon. Gentleman can rest assured that we are not in a position to publish or to produce anything at the moment. The factor of confidentiality is one of the points we have to consider very carefully in any


system which involves the integration of a large amount of information.

Value-added Tax

Mr. Kenneth Baker: asked the Chancellor of the Exchequer whether he has yet decided how many rates of value-added tax there will be.

Mr. Barber: No, Sir.

Mr. Baker: May I press my right hon. Friend to opt for just one rate of value-added tax? Having one rate and a zero rate means that there are two rates in practice, and if there are more than two, anomalies will proliferate. If this sort of thing happens, one of the great advantages of the tax—its fiscal impartiality—is compromised.

Mr. Barber: I will take into account what my hon. Friend said, but these are matters for decision nearer the time of implementation. I am aware that Norway, Denmark and Sweden have a single rate, while the practice in the E.E.C. varies from Germany's two positive rates in addition to the zero rate to France's four positive rates.

Mr. Marquand: Irrespective of the number of rates of value-added tax substituted for purchase tax and selective employment tax, it is bound to have a highly regressive effect, making the poor poorer and the rich richer. Will the hon. Gentleman undertake that, when the tax is introduced, if it is, compensating measures will be taken to protect those on low incomes?

Mr. Barber: No, Sir. As we said in the Green Paper, the effect on the cost of living of replacing purchase tax and selective employment tax by value-added tax will naturally depend on the decisions we eventually take on questions of coverage and rates, and decisions have not yet been taken on these matters.

Mr. Douglas: asked the Chancellor of the Exchequer what is the percentage of revenue raised by the European Economic Community countries from their value-added taxes; and what is the proportion of such revenues derived from foodstuffs.

Mr. Maurice Macmillan: The proportions of total revenue (excluding social

security contributions) derived from the tax in 1969 in the Netherlands, Germany and France were about 20 per cent., 25 per cent. and 45 per cent. respectively. Figures are not available for Luxembourg, or for the proportions derived from foodstuffs. Italy has not yet introduced a value-added tax and Belgium did so only on 1st January, 1971.

Mr. Douglas: Will the hon. Gentleman concede that these figures are apt to cause a great deal of disquiet if we have to accept, in joining the E.E.C., a system of value-added tax similar to those prevailing there? Are not the Government, by their policies at present. pre-empting a bargaining counter unnecessarily?

Mr. Macmillan: I cannot accept that latter point. The conditions in taxation, social security and other systems are so different that I do not think that one can draw the conclusions which the hon Gentleman has drawn.

Mr. Farr: Will my hon. Friend give a firm assurance that when value-added tax is introduced here it will not be applied to foodstuffs at any stage of their production?

Mr. Macmillan: My right hon. Friend and I and the other Treasury Ministers have given an absolute assurance that food, with the possible exception of those few items already subject to purchase tax, will be relieved of value-added tax. The method of so doing and the ways of doing it are under consideration. We have published a Green Paper and have not yet come to conclusions. We shall not reach our conclusions and announce them until there has been a proper amount of study.

Mr. Barnett: Will the hon. Gentleman answer the question, which he has still not answered? Will he make it clear that no element of value-added tax will be included in the price of food, whichever system the Government decide to adopt?

Mr. Macmillan: I make it clear again —it was stated in the Green Paper and has been repeated since—that food will be relieved of value-added tax. I will not go further than that until we have reached some conclusions from the study of the Green Paper.

Mr. Dixon: asked the Chancellor of the Exchequer what proposals he is considering for the introduction of value-added tax on house purchase.

Mr. Maurice Macmillan: As the Green Paper on value-added tax indicates, there will be special arrangements for housing; but the exact form of these special arrangements has still to be decided.

Mr. Dixon: Can the Minister confirm that owner-occupiers will not have to pay tax if and when they sell their houses?

Mr. Macmillan: As my hon. Friend knows, there is relief for such people on capital gains tax and there is a strong case for relief from value-added tax, but the details have to be worked out after consideration of the relevant factors, including the Green Paper and the views of the many interests involved.

Mr. Deakins: Can the hon. Gentleman assure us that his proposals, when they are published, will not discriminate unfairly between the different types of housing in that concessions given to home owners will also apply to rented accommodation?

Mr. Macmillan: The hon. Gentleman will have to await further details. Naturally this type of fairness as between taxpayers is one of the major considerations in the Department.

Mr. Warren: asked the Chancellor of the Exchequer if he will make a statement on the progress made in his consideration of the method of levy of the anticipated value-added tax.

Mr. Maurice Macmillan: The general scope of a possible scheme for V.A.T. is set out in the Green Paper. Consultations are proceeding and the views and suggestions offered by interested parties are being considered. It is still too early for decisions to have been taken.

Mr. Warren: Will my hon. Friend bear in mind that many business men, shopkeepers and hoteliers are worried about the amount of extra work which may fall upon them in implementing this tax, if it is introduced?

Mr. Macmillan: Yes, indeed. One of the difficulties is that some people are not quite as quick in coming forward as we

expected. If my hon. Friend will get in touch with Customs and Excise, or write to me or put in touch with me any of the interested parties to whom he has talked, that would be helpful all round.

Husbands' and Wives' Unearned Income

Mr. David James: asked the Chancellor of the Exchequer what is his estimate of the cost to the Exchequer of treating husbands' and wives' unearned income separately for surtax purposes.

Mr. Patrick Jenkin: The information is not available in such a form as to enable a reliable estimate to be made but the cost would be substantial, possibly of the order of £100 million.

Mr. James: As my right hon. Friend has, rightly, introduced the principle of separate taxation on earned income, would it not be right to extend the principle to what is in most cases retirement income? Will my hon. Friend look favourably on the proposition that, if the expense is prohibitive—as I am inclined to accent that it is—it would be fair marginally to increase the rates in order to do away with this anomaly?

Mr. Jenkin: I take note of what my hon. Friend said. The expense is great, and this has to be judged in the order of priorities and the other possibilities open to my right hon. Friend. I am sure that my hon. Friend will agree that the only pledge we gave before the General Election was to disaggregate earned incomes, which we have done by giving married couples an option.

Cost of Living and Increased Earnings

Mr. Costain: asked the Chancellor of the Exchequer what is his estimate of how much a single man, and a married man with one, two and three children under 11 years of age, respectively, needed to earn on 1st May, 1971, to offset the increase in the cost of living compared wth men in similar circumstances earning, respectively, £1,500, £3,000 and £5,000 a year in 1964, taking into account changes in the internal purchasing power of the £ sterling, income tax, surtax and family allowances.

Mr. Patrick Jenkin: As the reply contains a number of figures I will, with permission, circulate them in the OFFICIAL REPORT.

Following are the figures:


REQUIRED EARNINGS IN MAY, 1971 (ANNUAL RATE)


Annual earnings in 1964
Single person
Married, one child
Married, two children
Married, three children


£
£
£
£
£


1,500
2,117
2,133
2,139
2,148


3,000
4,182
4,198
4,207
4,218


5,000
7,376
7,297
7,268
7,242

£ Sterling (Purchasing Power)

Mr. Kaufman: asked the Chancellor of the Exchequer what is the purchasing power of the £ sterling now, taking it as 100p on 18th June, 1970.

Mr. Patrick Jenkin: No later information has become available since my right hon. Friend's reply to a similar Question by the hon. Member on 27th April.

Mr. Kaufman: Is the hon. Gentleman aware that, since that date, the electors have delivered their verdict on the answer? [Interruption.] Is not he aware that the rejection of 81 Conservative candidates out of 99 in the City of Manchester—[HON. MEMBERS: "Order."] —and 2,800 Labour gains in the rest of the country—

Hon. Members: Order.

Mr. Speaker: Order. Questions of order are for me.

Mr. Kaufman: —have demonstrated at a stroke what the people think about the lie on which the Conservative Party was elected?

Mr. Jenkin: I am sure that the hon. Gentleman was better employed doing public relations for the right hon. Member for Huyton (Mr. Harold Wilson).

Incomes (Tax Benefits)

Mr. Hugh Jenkins: asked the Chancellor of the Exchequer what will be the net increase in income afforded by his Budget to those in receipt of gross incomes of £20,000, £30,000 and £70,000 per annum, respectively.

Mr. Maurice Macmillan: If the hon. Member means the tax benefit accruing

to persons on particular incomes, the figures will depend on the personal allowances due to the individual and on the nature of his income. The hon. Member will find some information about earned incomes in Table 17 of the Financial Statement and Budget Report 1971–72.

Mr. Jenkins: Is it not the case that these incomes are typical examples of the salaries of chairmen of companies? Is it not further the case that it is in accordance with the Government's policy that the larger the income the greater the relief? Is it not a fact that the more the Government give to the wealthy the less there will be to give to the poor? Will he reconsider this policy, because if he does not, how can he blame people further down the line if they take the Government's example and endeavour to get the best they can for the people they look after?

Mr. Macmillan: It is true that in any system of progressive income tax any tax relief gives proportionately greater relief to those whose earnings are highest. They are still taxed heavily. In the group of incomes quoted by the hon. Gentleman, taking a married man with two children and earned income at the lowest, and an unmarried man with earned income at the highest, taxation varies at £20,000 between £10,000 and £15,000 and at £70,000 between £48,000 and £59,000. Those are considerable sums to pay in tax.

Sir B. Rhys Williams: Is it not the Government's duty to protect minority groups from injustices, whatever their financial status?

Mr. Macmillan: Probably the most damaging concept put across by such questions as those asked by hon. Gentlemen opposite is that there is some significant increase in yield to the Exchequer which could lead to reductions in taxation elsewhere, which, as hon. and right hon. Gentlemen know, is not the case.

Planning-Programming-Budgeting

Mr. Deakins: asked the Chancellor of the Exchequer to what extent he intends that the system of planning-programming-budgeting shall be introduced in his own Department.

Mr. Maurice Macmillan: Planning-programming-budgeting shows most promise as a tool for improving the allocation of resources within major expenditure programmes and is not really suited to a Department such as the Treasury which has only a small expenditure, mainly on staff.

Mr. Deakins: Is the hon. Gentleman not aware that management of Government expenditure is not merely a matter of providing accounting information, which is basically all that the Treasury gets at the moment, but also a matter of providing management information, which is different? Surely if the Treasury is to insist, as I hope it will eventually, that all Government Departments should introduce some form of P.P.B., it would be wrong, to put it mildly, if the Treasury did not introduce this system for its own expenditure?

Mr. Macmillan: As the hon. Gentleman knows, a number of Departments have responsibility for major expenditure work and are either operating a P.P.B. system or exploring whether one can be usefully introduced. As an example, the Department of Education and Science recently gave evidence to the Education and Arts Sub-Committee about its work on P.P.B. Hon. Members will also be aware that the Government have instituted a system of programme analysis and review which uses some of the concepts of P.P.B. on an output basis. This is being applied to major expenditure programmes and we hope that it will be expanded. On reflection, the hon. Member might agree that the work of the Treasury is so very small, with the exception of the Revenue Departments, that the limited effort which we can mount at the moment is better applied elsewhere.

Investment Income Relief

Mr. Adam Butler: asked the Chancellor of the Exchequer whether he has decided the size of the first slice of investment income relief, and at what rate this will apply.

Mr. Barber: No, Sir. This will be fixed in the 1973 Budget.

Mr. Butler: Would my right hon. Friend bear in mind especially the position of the pensioners who in some cases

are able to save during their working lives? Would he try to ensure that no tax obstacle is placed in their way to prevent them from putting aside sufficient to provide an income which will bring them at least to subsistence level and without having any effect on the State pensions they draw?

Mr. Barber: Those are certainly matters which I shall bear in mind.

Mr. Roy Jenkins: Can the right hon. Gentleman not give us some broad idea of what he has in mind? Unless we know whether he is thinking of a figure of £50, £500, or even £5,000, it is impossible to debate the principle of the matter.

Mr. Barber: I think that there is an Amendment down for discussion this afternoon in the name of the right hon. Gentleman. If he does not think it worth while discussing it, no doubt he will withdraw it and we shall get on with something else. I can only tell the right hon. Gentleman—and as an ex-Chancellor he will appreciate this—that it would be irresponsible to make a commitment now. It is only sensible that decisions on this matter should depend upon the circumstances in April, 1973, which is when the surcharge will come into operation.

Mr. Jenkins: The Chancellor should not try to take false points. I quite agree that he could not give an absolute commitment, but it does not make sense to discuss this unless he can give us some indication of what is in his mind. He must know whether he is thinking of a broad exemption or a very narrow one

Mr. Barber: If it is any guidance to the right hon. Gentleman I can tell him that it is unlikely that we shall accept his Amendment.

Money Supply

Mr. Le Marchant: asked the Chancellor of the Exchequer what is his latest estimate of the increase in the money supply in the second quarter of 1971.

Mr. Maurice Macmillan: I cannot usefully add anything to what my right hon. Friend said in his Budget Speech about the growth of the money supply in the earlier part of the financial year.

Mr. Le Marchant: Does Friday's Bank of England Consultative Paper show a


change of policy? Does it mean that monetary policy will be used to manage the economy or, on the other hand, is it just part of the general policy?

Mr. Macmillan: Perhaps the most accurate way of looking at the changes in the Friday paper is that they are changes in method without changes in basic policy.

Mr. Cant: Does the hon. Gentleman not agree that there is considerable confusion in the country about the Government's attitude to this problem? The Chancellor of the Exchequer in his Budget speech said that he was prepared to continue to finance inflation. In a subsequent speech he jumped on the fence and added to the confusion. According to the new Consultative Paper it is obvious that, with the withdrawal from the gilt-edged market, the Bank of England will control the money supply rigorously. The country is entitled to know where it stands.

Mr. Macmillan: The hon. Gentleman has come to a number of conclusions. I certainly do not agree that my right hon. Friend's monetary policy is in any way designed to finance inflation. As he said in his Budget speech, it is to achieve the necessary degree of expansion without adding to the pressure of inflation.

Pay Settlements and Unemployment

Mr. Strang: asked the Chancellor of the Exchequer if he will publish in the OFFICIAL REPORT the evidence that the major cause of the increase in unemployment is the high level of pay settlements since the autumn of 1969.

Mr. Barber: Yes, Sir. I will give it now. Firms are forced to economise in their use of labour, our exports become less competitive, imports take the place of home production, and investment programmes are cut back. In these and other self-evident ways, excessive pay settlements cause unemployment.

Mr. Strang: Is the Chancellor of the Exchequer aware that by no stretch of the imagination can that answer be called evidence? Can he produce any evidence to indicate that recent redundancies have been concentrated in those industries which have granted the highest pay settlements?

Mr. Barber: If the hon. Gentleman will talk privately to both sides of industry

he will find that leaders in the trade union movement no less than management will confirm that what I have said is true.

Mr. Sheldon: Is the right hon. Gentleman aware that what he said is quite different from what he said in his Budget statement. He is now squarely laying the blame on excessive imports arising from the difficulties of exporting firms. This will lead to the consequence that the problem is in exports alone. In view of the present balance of payments situation, is not this rather a surprising conclusion?

Mr. Barber: No, Sir, I did not say that. I gave a list of factors which are causing unemployment at the present time.

Fuel Oil and Petrol

Mr. Lane: asked the Chancellor of the Exchequer what is his latest estimate of receipts in 1971–72 from the duties on fuel oil and on petrol, respectively.

Mr. Maurice Macmillan: £145 million from fuel oil and £1,315 million from road fuel.

Mr. Lane: When my right hon. Friend is ready to take the next step in his excellent programme of tax reduction, will he consider these two duties very high in his list of candidates for reduction, particularly because of their effect on the cost of living?

Mr. Macmillan: I am sure that my right hon. Friend will note my hon. Friend's remarks.

Mr. Sillars: When the right hon. Gentleman is considering tax reductions, will he think again about the imposition of a meat tax on cheap goods coming from New Zealand which will shortly have a detrimental effect on the cost of living?

Hon. Members: Nonsense.

Mr. Macmillan: Apart from the judgment on that supplementary question which came from behind me, it has very little to do with the question of fuel tax.

Sterling Balances

Mr. Bruce-Gardyne: asked the Chancellor of the Exchequer what was the value of sterling balances at the time


of signature of the Basle Agreement, and at the latest date for which figures are available.

Mr. Maurice Macmillan: At end-September, 1968, the month in which the Basle Facility and the Sterling Agreements were concluded, gross overseas sterling area official and private sterling holdings amounted to £2,788 million. At December, 1970, they stood at £3,525 million.

Mr. Bruce-Gardyne: Will my hon. Friend tell the House whether the Government welcome or deplore the build-up of these potentially volatile claims against the central reserves since the signature of this Agreement? If the Government were faced with a choice between exchanging the present dollar guarantee for institutional holdings for a gold guarantee and allowing institutional holdings to be run down, would he choose the latter course?

Mr. Macmillan: Despite the fascination of my hon. Friend's argument, I will not be drawn into answering a hypothetical question. On the first part of the supplementary question, the answer can be implied from a knowledge of what the increase is and what the reasons for it are. About half the total increase represents the rebuilding of sterling holdings which were run down during the period between devaluation and the negotiations for the sterling agreement. The other half reflects the proportion of the increase in total reserves of the overseas sterling area countries which comes from their overall substantial balance of payments surplus.

Banking Arrangements (Competition)

Mr. Hordern: asked the Chancellor of the Exchequer what proposals he intends to make to the banking sector to change existing arrangements on lending ceilings, liquidity ratios, and competition for deposits.

Mr. Barber: These proposals are set out in the consultative document "Competition and Credit Control", published by the Bank of England last week. Copies have been placed in the Library.

Mr. Hordern: The Bank of England paper "Competition and Credit Con-

trol" will be widely welcomed, particularly by those who have long wished to see a greater degree of competition in the financial sector and a tighter grip on the money supply. It also accords very well with the Conservative policy of greater simplicity and competition within the economy. Will my right hon. Friend expand on the precise role of the Government Broker compared with that which he assumed 10 years ago, and the precise composition of the assets to be counted as assets by the finance houses in the future?

Mr. Barber: The last three points made by my hon. Friend should await the consultations which are now going on between the Bank of England and others concerned. I am grateful to my hon. Friend for what he said about the general proposals. I knew that they would have his support, and the support of some of his colleagues, because they have been pressing for action on this front for some time. All I can say at this stage about the Government Broker is that rates will tend to fluctuate rather more than previously, but it is important not to exaggerate the change. There is no reason why fluctuation in rates here should be greater than in other countries which order their affairs in this way.

Dr. Gilbert: Will the right hon. Gentleman bear in mind that many of us on this side of the House welcome the first crack against the bank cartel? Will he now tell his right hon. Friend the Secretary of State for Trade and Industry that he has no objection to action against the banks to end their collusive practices in charges, hours and the provision of services?

Mr. Barber: That is a matter not for me but for my right hon. Friend. I am grateful to the hon. Gentleman for what he said at the outset of his supplementary question. The Government want to see a competitive banking system, while still retaining an effective influence on the operations of the banks in so far as this is required for the purpose of economic and monetary management.

Bus Operators (Corporation Tax)

Mr. Farr: asked the Chancellor of the Exchequer if he will review the position relating to the payment of corporation tax by bus operators.

Mr. Patrick Jenkin: I am not aware of any need for a general review. But if my hon. Friend has a specific point in mind, I shall be glad to look into it.

Mr. Farr: Is my hon. Friend aware that, unlike normal bus undertakings, municipal bus undertakings are not liable for corporation tax? The passengers of the Midland Red Bus Co., which is a nationalised concern, have to foot a bill for corporation tax this year amounting to more than £500,000. I ask my right hon. Friend to look again at this situation, which imposes a burden on fare-paying passengers outside corporation bus districts.

Mr. Jenkin: When the Passenger Transport Authorities were set up, it was decided that they should inherit the municipal bus companies' pre-transfer losses. I will take note of what my hon. Friend said, although questions about bus subsidies generally are for my right hon. Friend the Minister for Transport Industries.

Sir R. Cary: Has not the National Bus Company made representations about this matter, and is it not under consideration at the moment?

Mr. Jenkin: I am not aware that that company has made representations to the Inland Revenue, but it may well have made them to my right hon. Friend the Minister for Transport Industries.

Prices and Incomes Policy

Mr. William Hamilton: asked the Chancellor of the Exchequer if he will initiate joint discussions with the Confederation of British Industry and the Trades Union Congress for the purpose of agreeing on a prices and incomes policy.

Mr. Barber: The National Economic Development Council will be discussing general economic matters at its meeting in July, and prices and incomes will be within the scope of this discussion.

Mr. Hamilton: Could the right hon. Gentleman say whether the Government's failure since July, 1970, to curb inflation is due to the fact that they have deliberately turned their faces against any semblance of a prices and incomes policy, and that this is leading to considerable

unemployment, considerable inflation of prices and injustice to people who cannot particularly bear it? Will he give an assurance that there will be some attempt soon by the Government to introduce a voluntary policy agreed by the C.B.I. and T.U.C. to bring an end to the present chaos?

Mr. Barber: As I said, there will be discussions on these and other matters at the July meeting of N.E.D.C. I have never ruled out a voluntary incomes policy, but it would have to be a real and genuine one and not a phoney, make-believe one.

Mr. Emery: Would my right hon. Friend say whether the Treasury or the C.B.I. or the trade unions are carrying through any consideration of restraining influences which might be placed on industry in the form of an excess wages tax?

Mr. Barber: It may be that this matter will be raised by somebody when we meet in July, but I do not know as yet.

Mr. Barnett: Since the Chancellor of the Exchequer said that he does not rule out discussion of a prices and incomes policy, does that mean he does not rule out discussions on price restraint?

Mr. Barber: I said that I have never ruled out a voluntary incomes policy, but it has to be a real and genuine one. I have no doubt that at the N.E.D.C. meeting in July in the wider economic context, we shall be discussing both prices and incomes.

Mr. Ashley: If the Chancellor of the Exchequer is unimpressed by the damage that is being caused to employers, trade unionists and low-paid workers by the absence of a fair prices and incomes policy, may I appeal to him to take action on the ground that such a policy will damage the Government?

Mr. Barber: I can only repeat what I said in answer to the original Question, namely, that these matters, together with others related to them, are for consideration at the July meeting of N.E.D.C., which is the forum where the C.B.I., the T.U.C. and the Government should discuss these matters confidentially.

Pakistan Flood Relief Fund

Mr. Woodhouse: asked the Chancellor of the Exchequer if he will authorise the use of money from the Pakistan Flood Relief Fund for purposes of civil relief arising from the recent internal conflict in East Pakistan.

Mr. Patrick Jenkin: I understand that my hon. Friend is referring to the money collected by a consortium of charities at the time of the cyclone disaster. Ministers of the Crown do not have the power to direct or authorise that money raised by public appeal for one charitable purpose shall be used for another.

Mr. Woodhouse: Although I recognise that people who subscribe to charity for a specific purpose would normally, rightly, resent having their money diverted to another purpose, would my hon. Friend not agree that the similarity of purpose in this case is so close that to insist on such a restriction is not only pedantic but inhumane?

Mr. Jenkin: I appreciate what my hon. Friend is saying. I recognise that many of those who subscribed to the fund would probably be only too happy that their money should go to relieve distress in the civil war, but I am sure my hon. Friend recognises that there would be dangers if the Government had power to authorise diversion from charitable funds from one object to another at the instance of the fund organisers, when the first commitment is not yet fully discharged.

Mr. Greville Janner: Will the hon. Gentleman say how much the Government are proposing to pay towards the relief of this dreadful disaster area?

Mr. Jenkin: That is not a question for me.

Premium Bonds (Prize Draw)

Mr. Rost: asked the Chancellor of the Exchequer how many premium bond prizes have been drawn on premium bonds not eligible for a draw because they have been encashed.

Mr. Patrick Jenkin: None, Sir.

Mr. Rost: Although I welcome the reply, which will reassure many premium bond holders who have been disturbed

by recent Press reports suggesting that premium bond prizes have gone to the wrong bond holders, is my right hon. Friend absolutely certain that there is no cause at all for any inquiry into the recording system of the premium prize draw?

Mr. Jenkin: I am quite satisfied that the administration of the premium bond office at Lytham reduces administrative errors to the maximum possible extent. The recent Press reports arose out of a correctly addressed warrant to a proper bond holder, which was misdelivered in the course of delivery by the Post Office.

Oral Answers to Questions — LORD PRESIDENT OF THE COUNCIL (SPEECH)

Mr. Barnett: asked the Prime Minister if the public speech of the Lord President of the Council at Framlingham on 30th April, 1971 on prices represents the policy of Her Majesty's Government.

The Prime Minister (Mr. Edward Heath): Yes, Sir.

Mr. Barnett: Would the Prime Minister confirm that he is considering punishment by tariff cuts? In the circumstances, presumably he has made an estimate of the effect on unemployment caused by increased imports and reduced home production? Would he give the House the estimate made by the Government of the increase in unemployment, which is already at a terrifyingly high level?

The Prime Minister: The Lord President's speech did not deal with that matter.

Mr. McBride: Is the Prime Minister aware that last week, in reply to a question on prices, he told me by letter that he would seek to strengthen the position of the Government in relation to the private sector? Would he now accept an invitation from me to say what legislative steps the Government propose to take to decrease prices in order to satisfy the British public?

The Prime Minister: We have already indicated that we propose to change the monopolies legislation.

Mr. Robert Hughes: On a point of order, Mr. Speaker. Is it possible for you to ask the Prime Minister to speak up?

Oral Answers to Questions — CEYLON

Mr. Dalyell: asked the Prime Minister whether he will now seek to make an official visit to Ceylon.

The Prime Minister: I have nothing to add to the Answer I gave to a similar Question from the hon. Member on 18th February.—[Vol. 811, c. 562.]

Mr. Dalyell: In view of the tragedies which have occurred in Pakistan and Ceylon, should not we be more discriminating about the Governments in Asia to whom we supply arms? Is it wise at this stage to become entangled in propping up in a military capacity the Sultan of Brunei?

The Prime Minister: That has no relationship to the Question put by the hon. Gentleman, which is about Ceylon.

Mr. Burden: Is it not clear that any arms now being used in South-East Asia were supplied by the last Government?

The Prime Minister: I have already told the House that when the democratically-elected Government of Ceylon asked Her Majesty's Government for support to deal with insurrection, we thought it right to support them.

Oral Answers to Questions — COATBRIDGE AND AIRDRIE

Mr. Dempsey: asked the Prime Minister if he will make an early official visit to Coatbridge and Airdrie.

The Prime Minister: I have at present no plans to do so.

Mr. Dempsey: Is the Prime Minister aware that, if he had accepted that genuine invitation, he would have been given a first-hand account of the serious unemployment situation in Coatbridge and Airdrie? Does he realise that more than 6 per cent. of the insurable population are out of work, involving 2,500 men, some of whom have been unemployed for nearly a year, 220 boys under the age of 18, some of whom have reached 18 and have never worked, and the remainder girls? Would he consider taking remedial measures, such as steering work into Coatbridge and Aidrie now and providing a crash building programme of new factories? In addition,

would he make Local Employment Act grants much more attractive so that more people will be given a right to work in my constituency?

The Prime Minister: I am well aware of the particular difficulties of the hon. Gentleman's constituency. Unfortunately, unemployment in North Lancashire is not a new phenomenon. What the Government have done is to make the hon. Gentleman's constituency part of the West Central Scotland—[Interruption.] If hon. Members opposite do not want any action taken, they had better say so. The situation in North Lancashire is being dealt with by making it a special development area, which the previous Administration never did, despite the problems which existed locally.

Mr. Cant: On a point of order. Is not the Prime Minister's navigation a little at fault?

Mr. James Hamilton: Is the right hon. Gentleman aware that there is a great fear in Lanarkshire that the present Government will surpass the record figure of unemployment in Lanarkshire in the postwar years, which reached 19,500 in 1962? Is he further aware that there is a protest en route to two of his Ministers, the Secretary of State for Trade and Industry and the Secretary of State for Scotland, who have refused to meet the Development Council in Lanarkshire about the unemployment position? Will the Prime Minister now direct his Ministers to meet this very responsible body in order to tell its representatives the Government's plans?

The Prime Minister: If an organisation asks to meet Ministers, its request will be given proper consideration.

Oral Answers to Questions — COMMONWEALTH TOUR

Mr. Marten: asked the Prime Minister what plans he has to make a Commonwealth tour this year.

The Prime Minister: Since taking office, I have visited Canada, Cyprus, Pakistan, India, Malaysia and Singapore. I have at present no plans for further visits.

Mr. Marten: In spite of that, when my right hon. Friend visits President Pompidou, will he stress to him the


firm and sincere belief of the whole House in the Commonwealth, which my right hon. Friend has done very much to foster, and, at the same time, stress our belief in the use of the English language so as to avoid misunderstandings about French translations?

The Prime Minister: The President of France is well aware of the close connection of Britain with the Commonwealth—[HON. MEMBERS: "Speak up."] Hon. Gentlemen should listen. As for the English language, automatically it becomes an official working language of the Community if we become a member.

Mr. Raphael Tuck: Before the right hon. Gentleman visits the sugar-prod-acing countries, which are members of the Commonwealth, or New Zealand, will he address himself to the callous indifference which appears to have been shown by the Chancellor of the Duchy of Lancaster to those countries in Brussels?

The Prime Minister: That comment is thoroughly unjustified. This matter was dealt with in detail yesterday when my right hon. and learned Friend described the form of the assurance. What is important for the Caribbean countries is that it has now been accepted that they should be given the opportunity of association under Part Four of the Treaty, which governs all their products and gives them very satisfactory terms for dealing with the Community. Included in those products is sugar, and my right hon. and learned Friend dealt in detail with this subject yesterday.

Mr. Adley: If my right hon. Friend visits some of the Commonwealth countries, especially those in the Caribbean, will he take a long look at the role of sugar in their economies and its relative importance in comparison with tourism? It would be unfortunate if people were left with the impression that sugar is the only future for some of these countries.

The Prime Minister: That is true, and the Caribbean countries have themselves been trying to diversify for a long time, in many cases with considerable success. This emphasises the importance of the opportunity of association under Part Four of the Treaty, because it is not confined to one product. It deals with the economy of those countries as a whole.

Mr. Milne: Is the Prime Minister aware that, when the fate of the Commonwealth is being dealt with, should we enter the Common Market, the Commonwealth countries to which he refers will be on the outside looking in and will not be part of those negotiations in the 1974–75 period? This is a betrayal of the Commonwealth at this stage in our history.

The Prime Minister: The hon. Gentleman is completely unjustified in using such words as "betrayal", which in no way describe our policy in the negotiations. If anyone had given any consideration or examination to the Community, he would know the close relationship which exists between member countries and the associated States and the part that those associated States play in the negotiations under the Yaoundé Convention.

Mr. Peart: Is the Prime Minister aware that sugar is still the main prop for most countries in the Caribbean and, therefore, that any depression there would have serious social consequences? On the question of association, is the Prime Minister further aware that, in reply to the right hon. Member the Father of the House, the Chancellor of the Duchy of Lancaster said on a previous occasion in this House that association would not give us a specific guarantee?

The Prime Minister: As I explained to the House last Thursday and as my right hon. and learned Friend the Chancellor of the Duchy of Lancaster emphasised yesterday, when the Yaoundé Convention comes to be renegotiated—and existing arrangements carry on until then —we shall be a member of the Community with our full rights and, therefore, we shall be able to negotiate the next Convention from inside the Community if we are a member. This must be the main safeguard.

Oral Answers to Questions — PRICES AND INCOMES (MINISTERIAL RESPONSIBILITY)

Mr. Ashley: asked the Prime Minister if, in view of recent wage settlements and price increases, he will now assume responsibility for the execution of Government policies on prices and incomes.

The Prime Minister: I would refer the hon. Member to the answer I gave on 11th May to a Question from the hon. Member for Bassetlaw (Mr. Ashton)—[Vol. 817, c. 201–2.]

Mr. Ashley: Since injustice is being done and being seen to be done as a result of the Government's unfair wages policy, will the Prime Minister invite the leader of the Union of Post Office Workers to the July meeting of the N.E.D.C., so that he can explain the urgent need for a fair incomes policy which does not discriminate against the public sector?

The Prime Minister: The membership of the N.E.D.C. is settled, and it is not the custom, as I understand it, for other parties to be invited to its meetings, which are confidential. As for the Post Office settlement, that was the recommendation of the independent committee of settlement to which the parties to the dispute made nominations.

Mr. Arthur Lewis: Will the Prime Minister explain why it is that all members of the Government continue to attack what they call high wage awards, and yet, on the Order Paper today, there is evidence of one person getting an extra £73 a week on £10,000 a year, and another getting an extra £100 a week on £25,000 a year, and not one Minister, including the Prime Minister, has ever condemned any of these astronomical increases paid to people who are in receipt of £20,000 and £30,000 a year? Will the right hon. Gentleman make one condemnation of these very high increases to the very well paid?

The Prime Minister: We have always said that inflationary wage increases are the cause of price increases. There can be no doubt about that. However, if the hon. Gentleman wants an egalitarian system, that is not a principle which we can accept. As for Her Majesty's Ministers, there has not been a change in their remuneration.

Mr. Arthur Lewis: Speak to the G.L.C.

Oral Answers to Questions — COST INFLATION AND UNEMPLOYMENT

Mr. William Hamilton: asked the Prime Minister how many letters he has

received in the last six months about the relationship of cost inflation to unemployment; and what reply he has sent.

The Prime Minister: The information is not available, since statistics of this kind are not kept. But many of my correspondents recognise that inflationary wage claims lead to rising prices and increased unemployment; and I agree with them.

Mr. Hamilton: The right hon. Gentleman continues to make that assertion without a scintilla of evidence. Does he not recognise that the highest unemployment is in precisely those areas where there is no cost inflation and where wages are very much lower than in other parts of the country? Will he say when his Government intend to accept complete responsibility for the criminally high and rising unemployment that we shall see in the coming months?

The Prime Minister: I stated the contents of the letters, which is what the hon. Gentleman asked for in his Question. This is the view of a very large number of those who write to me. The country recognises more and more the truth of this matter.

Mr. Lane: As it was the present Leader of the Opposition who, in 1966, told the T.U.C. that wage restraint was the only guarantee against unemployment, will my right hon. Friend agree that it is high time that the right hon. Gentleman started to re-educate his hon. Friends?

The Prime Minister: I agree with my hon. Friend. I made a reference to the Leader of the Opposition the other day on this matter, and the right hon. Gentleman nodded in agreement and in no way differed.

Mr. Harold Wilson: I gave that warning on a number of occasions in the context of a balance-of-payments deficit, not in the context of a balance-of-payments surplus. Is the right hon. Gentleman aware that what is puzzling most people is that, with a balance-of-payments surplus of £600 million—which he denied last year—instead of using it for expansion and a reduction of unemployment, he is using it for policies of increased unemployment?

The Prime Minister: While we are always grateful for anything which


appears to be a new thought from the Leader of the Opposition, it is surely a strange one that, with a balance-of-payments surplus, we can thereby justify inflationary wage claims.

Mr. Tugendhat: Does my right hon. Friend agree that the balance-of-payments surplus is in this sense irrelevant in that the main damage done by inflation is to redistribute wealth from the weak to the strong and that high wage claims make it much harder for those who are not members of trades unions and for those on fixed incomes and earning small incomes?

The Prime Minister: It is this which causes social injustice. In fairness to the Labour Party and to many hon. Gentlemen opposite sitting below the Gangway, it was a point which they constantly emphasised against their own Government's compulsory prices and incomes policy.

Mr. Heffer: Is it not clear that the surplus will be used by the Government for entry into the European Economic Community? Is it not also clear that the right hon. Gentleman and the Chancellor of the Exchequer have not given one shred of evidence on the point that high wages lead to increased unemployment? Will the right hon. Gentleman give us the names of the firms, the industries, and the factories which have had unemployment as a result of high increases in wages?

The Prime Minister: It was the hon. Gentleman's right hon. Friend, the Chancellor of the Exchequer in the previous Administration, who emphasised, quite rightly, in his Budget speech that the balance-of-payments surplus was required in part for the repayment of debt, which is still the case, and in part for the transitional period if this country were to become a member of the European Economic Community. I should not have thought that there was any difference between us on that point.
Concerning redundancies, anybody who has any connection with industry knows full well that high wages are the cause of unemployment.

Mr. Harold Wilson: The right hon. Gentleman is now getting into the same fallacies as his noble Friend the Lord Chancellor when he said that Hitler came

to power because of inflation when it was because of the deflationary policy of the German Government. Is not the reason for unemployment in this country today not inflation but the deflationary policies of the Government.

The Prime Minister: That cannot be the case, because they are not deflationary policies.

STATEMENTS

Mr. Pavitt: On a point of order, Mr. Speaker. I know that you have no jurisdiction over Ministers, but you have a duty to protect back benchers. Yesterday on the tapes it emerged that the Secretary of State for Social Services was to issue his long awaited statement on the complete reorganisation of the National Health Service. This point has been pressed in this House for some time. We have been awaiting this important document, because one consequence of the discussion will be a complete change of every committee.
This is the third in a series. There have been two similar documents previously. On each previous occasion the Secretary of State has made a statement to the House and in consequence there has been an exchange. The last occasion was 11th February, 1970. Hon. Members will find that at c. 1255 there was a heavy exchange about the results of the document being introduced.
Therefore, I ask whether it is possible for you, Mr. Speaker, to make sure that in future such documents are presented to the House first, not to the Press, and that when they are presented there is an opportunity for exchanges. As it is a Green Paper consultative document, there will be an opportunity of pursuing it later, but it is helpful if at the outset we can have an initial look at the matters being put before us.

The Lord President of the Council and Leader of the House of Commons (Mr. William Whitelaw): Further to that point of order. It is only fair to the hon. Member for Willesden, West (Mr. Pavitt) and to the House that I should make clear the policy which I have stated to the House before and which I understood to have general acceptance. It was that as we wish to limit the number


of statements, and, therefore, the interference with the normal business of the House on any particular day, in future statements would not be made when White Papers or consultative documents were being published which could be considered and thereafter no doubt at some stage be discussed in the House. I thought that it was generaly accepted by the House that statements on the day of introduction of such documents would not normally be given in future.

Mr. Speaker: The point has been ventilated. It is not a point of order. It is a matter which could appropriately be put on the business statement. The Chair is put in a difficulty when this kind of matter is raised as a point of order. I do not think it is anything to do with order. However, the point has been made.

TRANSPLANTS

3.36 p.m.

Mr. Tam Dalyell: I beg to move,
That leave be given to bring in a Bill to implement the recommendations of the Committee chaired by Sir Hector MacLennan on the transplant of human organs.
This Bill, which has all-party support, is to implement the recommendations of the Committee which reported in July, 1969, under the chairmanship of Sir Hector MacLennan, then the President of the Royal Society of Medicine, which advised on transplantation problems on the question of amending the Human Tissue Act, 1961.
The House knows perfectly well that any attempt to get Ten Minute Rule legislation at this season of the Parliamentary year is doomed to failure. Therefore, I had better declare that the real object of the Bill's sponsors and myself is to register the opinion that the MacLennan Committee's Report should not be left to accumulate dust in some pigeon hole in the Department of Health and Social Security but that the Government should come forward with their own proposals on the whole question of spare-part surgery during the next Session of Parliament and to ensure that this subject reaches the Secretary of State's in-tray.
On one thing at least the House can be agreed: that there is a very wide consensus that, with the surgical possibility of carrying out more and more organ transplants, the current situation is extremely unsatisfactory.
As of now a hospital often has to phone the relatives of a young man or woman who has been unexpectedly killed—perhaps in a road accident—and ask for permission to use the organs of their loved one at the point of maximum grief. Anyone who has been in a hospital and seen this being done cannot but be moved at the human emotion involved in the situation.
The House will readily understand that this is no time in a family's affairs to reach what is a very private, personal and, indeed, important decision. It is clear that the decision whether a person's organs should be given to what might loosely be called an organ bank rather than be cremated or buried should be taken in a cool moment, not in a moment


of emergency. The present situation is unsatisfactory because no one thinks that road accidents or sudden death is something which comes to him; it happens only to other people. Therefore, we never get round to volunteering.
In terms of policy, we are confronted by two possibilities. Either a system of contracting out—that is, taking anyone's organs after clinical death has been established other than of those who have taken the trouble to object during their lifetime—or of contracting in—that is, volunteering during one's lifetime the use of one's organs—should they be needed. Both systems would assume a register of information on—dare I say to some of my hon. Friends and, indeed, hon. Gentlemen opposite after what the House has recently been discussing—a computerised register to which transplant teams could have easily available access.
The MacLennan Committee had a narrow majority. It is a Government-endorsed and Government-publicised voluntary system for which this Bill asks. It asks, inter alia, for the Government to try, in the first instance, to have a well publicised Government-sponsored campaign for a voluntary system. I am authorised to tell the House that the member of the MacLennan Committee who argued most strongly in favour of a system of contracting out, as they have in Scandinavia, Professor Roy Calne of Cambridge, has said that he would now accept a system of contracting in in the first instance.
In the summer of 1969, I was involved in an extensive survey of public attitudes, something which is perhaps more easily done by a Member of Parliament than by the Government Social Survey, because we can ask private and personal questions with some authority and with a hope of frank answers. I did this survey over 43 days in West Lothian of 1,000 families individually on their whole attitude to the question of human organs and transplant problems.
There were 208 "don't knows", including many who had reflected most deeply on the issues after the "Panorama" team had gone into the Report of the MacLennan Committee

fairly deeply. There were 112 who were totally against, including some registered nurses who simply took the attitude that there were more important things to do in hernia operations end other simple operations rather than in spectacular surgery. There were 316 who were in favour of contracting in and 364 would have found contracting out to be acceptable.
I claim no more for these figures than that they are from people who are prepared to talk seriously about personal matters to their Member of Parliament in their own homes, and it represents a fairly accurate survey of public attitudes, at any rate in the industrial North. The results might be a bit different in London and the Home Counties and different again in rural areas like the Scottish Highlands.
Those who were for contracting out represented the largest single group, assuming that those against and the "don't knows" would mostly prefer volunteering. It should be assumed that the majority would go for contracting in. This is what the Bill asks for, with the support of Sir Hector MacLennan, the enthusiastic support of Sir Michael Woodruff and many other surgeons who are frustrated at the present system, under which they see their patients slipping away for the want of organs which are being buried and cremated.
In the words of Professor Woodruff:
It is important to let the public see that a campaign to promote a system of contracting in has the support of the countries' leaders and is not just the notion of a few crackpot professors of surgery.

Question put and agreed to.

Bill ordered to be brought in by Mr. Dalyell, Mr. Cronin, Mr. Lane, Mr. Maclennan, Mr. Meacher, Mr. O'Malley, Doctor David Owen, Mr. Pavitt, Miss Pike, Sir M. Stoddart-Scott, and Dr. Trafford.

TRANSPLANTS

Bill to implement the recommendations of the Committee chaired by Sir Hector MacLennan on the transplant of human organs, presented accordingly and read the First time; to be read a Second time upon Friday, 21st May and to be printed. [Bill 172.]

Orders of the Day — FINANCE BILL

Clauses 8, 10, 22, 30 and 49 and any new Clause relating to purchase tax

Considered in Committee [Progress, 12th May].

[Sir ROBERT GRANT-FERRIS in the Chair]

Clause 22

INCOME TAX CHARGED AT BASIC AND OTHER RATES

3.43 p.m.

Mr. John Pardoe: I beg to move Amendment No. 12, in page 26, leave out lines 16 to 26 and insert:

(a) in respect of any income not falling within paragraph (b) below, at such graduated rates as Parliament may determine and shall be known as Personal Employment Tax, and
(b) in respect of any investment income at such graduated rates as Parliament may determine and shall be known as Personal Property Tax.
The Chancellor's proposals for tax reform, especially for the reform of personal direct taxation, are extremely welcome to Liberals. What I propose in the Amendment is not directly contrary to the tenor of the Chancellor's wishes or his specific proposals. Rather is it an extension of them, and I hope that it will be received by the Financial Secretary in that light.
To some extent, the right hon. Gentleman's recommendations follow those of the Liberal Party's tax reform proposals, which is hardly surprising since the Conservative Party has also had the benefit of the advice of Professor Wheatcroft, who has now been sent on a peripatetic tour of the country to persuade the nation at large that the Chancellor means business and sense. He specifically put this proposal in an earlier publication on behalf of the Liberal Party.
The present system of direct taxation is complicated and incomprehensible to most people. We have allowances and exemptions and these tend to make absolute nonsense of the so-called standard

rate. I maintain that it will continue in future to make nonsense of what the Chancellor now proposes to call the basic rate.
The Chancellor has himself described the present system as too cumbersome, too complex and in many respects absurd, and I could not agree more. He has proposed simplification, but I am not sure that he has gone far enough in this respect. We are told that the Chancellor really wants to go for taxation reform. In his Budget Statement he said:
We have two taxes on personal income—ordinary income tax and surtax.
He said that the two systems had been subject to separate collection and computation and that this was unnecessarily complicated and a historical anachronism He is absolutely right to attack this system.
He went on to suggest that we had a standard rate which applied only to investment income, which, after all, is only 5 per cent. of all taxable income; it is crazy that we should run the whole of our tax system according to a tax rate which applies to only 5 per cent. of all taxable income.
He went on to say that no one knew what the marginal rate of tax was:
Many people think that their marginal rate of tax is much higher than it actually is, because they confuse it with the standard rate.
I have myself moved Amendments to previous Finance Bills trying to ensure that this paradox should be swept away. He proposed, therefore,
… to replace the existing income tax and surtax … with a single graduated personal tax."—[OFFICIAL REPORT, 30th March, 1971; Vol. 814, c. 1386.]
He went on to say that the distinction between unearned and investment income must remain. I will not argue that this afternoon. It is no part of my purpose to argue the distinction between tax on earned and unearned income or earned and investment income, whichever one wishes to call them. There are plenty of uncertainties in the argument. There is, first, the question of whether high income equals high growth, and, second, whether high taxation on investment income leads to low investment, which the Chancellor has accepted but which I think is an over-simplification of the factors involved.
There is a third question—whether high taxes on investment income promote the egalitarianism or distribution. Again the answer is exceedingly doubtful. If that is our aim, as it is certainly mine, it is far better to concentrate on taxes which directly relate to the distribution of wealth such as a gifts tax and an effective and involuntary death tax. That is a far better way of going about it than we have done in the past.

Mr. Raymond Gower: Is the hon. Gentleman prepared to consider the effects of this kind of tax on, for example, encouraging people to save, which all parties have accepted to be an extremely desirable object?

Mr. Pardoe: I agree that savings are desirable, but the connection between savings and high investment on the one hand and savings and high growth on the other is by no means certain. This is why I do not wish to delve into that issue today.
I am, however, asserting that whether or not we want it the distinction will remain for a considerable time, as the Chancellor accepted when, in his Budget Statement, he said that it would remain for the foreseeable future, and certainly for the next tax year. The distinction should remain because it allows considerable flexibility for any future Chancellor.
I am seeking by the Amendment to distinguish clearly between two types of taxation—between tax on earned income and tax on investment income. Parliament could still fix the same rates for these two taxes, and this is part of the flexibility which Parliament, or any future Chancellor, would have if the Amendment were accepted. A future Chancellor would have the added flexibility of being able to impose different rates at different income levels, or any other combination which might be desired.
If we called these taxes by different names and clearly separated them, we would at least know exactly where we were, and that would be preferable to the present confused set-up or the position as it will exist under this Finance Bill.
There is, first, the tax which I have called a "personal employment tax"—a name which would clearly cover a tax on all incomes from wages, salaries and pen-

sions—and, second, what I have called a "personal property tax"—which would cover income received by individuals from dividends, interest, rents, annual payments or annuities, income from foreign sources other than trades and emoluments and payments under divorce court or maintenance orders. That would happen under the first part of the Amendment.
The second part of the Amendment is related to the whole business of graduated rates. Here I believe the Chancellor's proposals do not measure up to what he appeared to want in his Budget Statement, and probably what he still wants, and I am not sure that he will get what he wants from the Clause as it stands.
In his Budget Statement the right hon. Gentleman spoke of "a graduated personal tax". I thought that he really meant a graduated tax, because if direct taxation is a disincentive to effort—it is open to argument whether it is; I believe that there must be a point at which it acts as a disincentive, though I do not know what that point is—it is clearly a disincentive at the margin, and particularly at that point of the margin where the tax rate on the next £ of earnings is substantially higher than it was at the last £. That is undoubtedly the point at which disincentive creeps in at its maximum.
We now have a system where there is a colossal jump from the point at which one pays no tax to the £ when one is paying the full standard rate, or "basic rate" as it will be called in future. We are, therefore, suggesting a genuinely graduated tax. The Chancellor said that he wanted such a tax, though he went on to say:
the tax structure will be founded on a basic rate covering a broad band of income and corresponding to the standard rate less earned income relief."—[OFFICIAL REPORT, 30th March. 1971; Vol. 814, c. 1387.]
This is where the right hon. Gentleman has made his greatest mistake in his reform proposals, because the standard rate is a curse and the basic rate will become a curse to all tax gatherers and future Chancellors.
We need a genuinely graduated tax with no large jumps. I suggest, as we suggested in our tax proposals in the sixties, that throughout the band of taxation on income there should never be a jump of more than 5 per cent. above the


previous level. One could juggle with the distance between jumps. For example, the jumps could be further apart in the middle income levels and get closer together up the income scale. Indeed, this would probably be right.
Nevertheless, the jumps even at the higher income levels should never be more than 5 per cent. at each stage, and I would accept an upper limit so that no part of any earned income was taxed at more than 70 per cent. The personal property tax should also, of course, be a graduated tax, for obvious reasons, many of them the same as those I have adduced for the employment tax. However, the rates could, perhaps, be slightly higher.
They could, as I have suggested, be the same if Parliament so wished, though the jumps from rate to rate could be bigger—they could be, say, 10 per cent. rather than the 5 per cent. I recommend for the personal employment tax—and we could have built into the system an exemption on the personal property tax for the first part of an income to encourage small savers and reduce administrative costs.
This would be a considerable improvement. A further improvement could be achieved if, instead of retaining the existing pattern of personal allowances, as the Chancellor intends, these sums were taken off the tax rather than off the income before being taxed. This would make the whole business of computing the individual's tax liability much simpler.
The Amendment would further simplify the tax reforms which the right hon. Gentleman is introducing. It would allow far greater flexibility and remove a certain hypocrisy. Will it ever be possible for any future Government to tax income from property—shares or whatever property it might be—at exactly the same rate as income from work? I doubt whether it will ever be politically possible for that to happen, whether or not a future Government desire it to happen.
If it is ever attempted, to make it politically palatable it will be necessary to build into the taxes on earned income a whole series of allowances, as we have done in the present system, and these will have to be set against income from work. I suggest that these allowances

will build up to the point at which they will have to be set against income from system. It seems sensible, therefore, for us now to make a clear distinction between these two taxes so that we do not have to complicate each of them, as we now do, with a paraphernalia of allowances and exemptions.
I hope that the Financial Secretary will, in considering the Amendment, seek further advice from industry and his tax advisers about how my proposal would work in practice. I suggest that the Amendment follows the logic of the arguments and aspirations of the Chancellor witch, in the matter of tax reform, I largely support.

Mr. Gower: I listened to the hon. Member for Cornwall, North (Mr. Pardoe) with much interest and a good deal of sympathy. Unintentionally, perhaps, he is exaggerating the degree of simplicity that can be achieved by this change. If one wants a sophisticated system giving weight to the great variety of individual cases of numerous kinds of taxpayers, inevitably that system cannot be simple. If one considers quite straightforward cases, of one taxpayer being a single person, another being married, or another having large family responsibilities, to give weight to these differences one is bound to have a fairly elaborate system if it is to affect the infinite variety of taxpayers. The hon. Gentleman gave the impression, perhaps unintentionally, that by a mere change of wording we could achieve tremendous simplicity as opposed to the present confusion.
I agree that the complaint of many taxpayers is that the system is too complicated. But in most cases, that complication reflects the attempts which have been made for many years to do justice to the individual taxpayer. What the hon. Gentleman regards as complication and confusion has emerged from the very conscientious attempts of successive Chancellors of the Exchequer to create a tax system which would reflect the innumerable differences which obtain on personal incomes. Nevertheless, there may be some virtue in the gradation suggested by the hon. Gentleman. Those differences could bring, in the long run, a new kind of confusion. In seeking to remove one source of complication and trying to achieve a new kind of justice, it may be that we would be introducing a new


degree of complication. I should not wish to be dogmatic about that, but the hon. Gentleman has erred, perhaps —it is not a serious error—in conveying by his remarks that we could achieve great simplicity and, at the same time, produce a system which would do justice to the great variety which must obtain in the taxation of the individual.

4.0 p.m.

Mr. Emlyn Hooson: The hon. Member for Barry (Mr. Gower) need have no fears as the tax system of this country, because of the nature of the country and our society, is bound to be complicated and sophisticated. All that successive Chancellors have purported to do, with varying degrees of success, is to make it less complicated or less sophisticated than they have found it.
I think it was Gladstone who said that with income tax one should seek to be "bold, intelligible and decisive". Few Chancellors have matched up to that precept, but it is a welcome sign that the Government have set about a long overdue simplification of the income tax system.
My hon. Friend the Member for Cornwall, North (Mr. Pardoe), in his commendable and incisive speech, followed the advice given to the Liberal Party in 1962 by a Committee set up under the chairmanship of Professor Wheatcroft. It was a very distinguished Committee. All its members were experts on tax matters from different points of view. For example, Mr. Hubert Monroe, one of the leading tax counsel, was a member.
The committee suggested that there should be four categories of taxation: three governing personal income—one a personal business tax, additional to the two that my hon. Friend has mentioned —and another a company tax. Therefore, there would be four clear categories of taxation. This would still allow for a considerable degree of sophistication and inevitably would have to allow for graduation and, as the Wheatcroft Committee suggested, for the not so steep step from one graduation to the other. On personal taxation, especially personal employment taxation, it was suggested that it should be no greater than 5 per cent.
I shall be interested in the answer that will come from the Government Front

Bench. Clearly there is a case for greater efforts to simplify the tax system. One of the great faults that all reformers have followed when on the Government Front Bench is to try to introduce these things in too piecemeal a fashion. Often one finds that one stage of the reform is introduced and the other stages are not introduced for many years subsequent to the original introduction. As a result we have a build-up of piecemeal reform which ends up as a far more complicated tax system than we need.
If the Chancellor has in mind the reform of the categories of taxation upon which he expounded in his Budget speech, I cannot see why my hon. Friend's proposals should not be accepted. It seems that they would result in a more intelligible system of tax and would meet everything that the Chancellor has in mind.

The Financial Secretary to the Treasury (Mr. Patrick Jenkin): I begin by expressing gratitude to the two spokesmen of the Liberal Party for the very warm and genuine welcome they gave to the reform announced by my right hon. Friend in his Budget Statement. I was intrigued to see that the whole of the Liberal Party was present to hear the hon. Member for Cornwall, North (Mr. Pardoe) expound his views as to how we might, as he put it, extend our reforms along the lines he recommended to the Committee. However, having said that, I fear that I must immediately go on to disappoint him, because the main point I wish to make to him is that, so far from being an extension of the reforms embodied in the Bill and the structure which we have embodied in the Clause we are discussing, his scheme would be bound to mean a fundamental alteration of our proposals. In fact, it would be an entirely different scheme and would require a complete redrafting of a great many of the Clauses in this part of the Bill and of the Schedule. For this reason I ask the Committee not to accept the hon. Gentleman's Amendment.
I do not wish to attach too much weight to the form of the matter. One appreciates the problems faced by hon. Members who have not the advantage of parliamentary draftsmen when considering complex legislation, and I do not want to make too much of that. But on the substance of the matter, I wonder whether


the hon. Member is justified in claiming that his proposals would represent a great simplification over the existing system, or certainly when compared with the reform embodied in the Bill. After all, one of the main points that my right hon. Friend made in his Budget Statement was that when considering personal taxes, we had two separate tax systems, as the hon. Member acknowledged—income tax and surtax.
We have the advantage of a not dissimilar speech made by the hon. Member during the Committee stage of the 1969 Bill. There was some progress on that, as I shall mention. As I listened to the hon. Member, it seemed that all he was proposing was the substitution of one dual system of personal tax for another. Instead of having income tax and surtax, he would have his personal employment tax and personal property tax. With the best will in the world, I cannot see that this would achieve the greater simplicity and flexibility which he claims for it.
When speaking in the 1969 debate on 13th May, the hon. Gentleman proposed four taxes, as the hon. and learned Member for Montgomery (Mr. Hooson) recognised—a personal employment tax, a personal business tax, a personal property tax and a company tax. I suppose it must be regarded as progress that we have now got down to two. In this part of the Bill we propose one personal tax—a graduated personal tax which will be much more simple than that proposed by the hon. Gentleman.
There are serious difficulties about the hon. Gentleman's proposal, not the least of which is that it would need very complex provisions indeed if one were to ensure that a man whose income was half earned, so that it came under the personal employment tax, and half investment, so that it came under the personal property tax, was not to end up by paying substantially less tax than a man the whole of whose income was earned. It may be that the hon. Gentleman's intention is that the tax paid by such a man should be less, but I doubt it. The hon. Gentleman said some very sensible things which no doubt we can return to on a later Amendment.
I am advised that, if we were to succeed in ensuring that this was a graduated tax as regards the individual taxpayer's

total liability, we should need complex provisions, much more complicated than the relatively simple investment income surcharge which we shall be debating later today.
The hon. Gentleman made a rather surprising statement about allowances under the present system. Allowances are indeed expressed in the Act in terms of tax. Anybody who has tried to weave his way through the relevant Sections of what is now the Income and Corporation Taxes Act to ascertain the taxes knows that this is a very complex business, because it is always expressed in terms of tax on a certain slice of a taxpayer's income. We are getting away from this. We are expressing allowances in terms of income, so that the allowance is deducted from the income before the taxable income is calculated. That is the sensible way of doing it.
The minute there are two taxes we are landed with the considerable problem of how to allocate the allowances between the two sets of income. Obviously we have to make some firm rules. Broadly our rule is that personal allowances will go against earned income before they go against investment income. That seems sensible.
On one point I agree with the hon. Gentleman, but this is only in a sense in part relevant to the debate. I agree with the hon. Gentleman that the jump to the basic rate—provisionally fixed in the Bill at 30 per cent.—is a high one. I have no doubt that my right hon. Friend will be very conscious of this as we are able further to reform and modify the lax system. As regards the rates above the basic rate—this is a point to which I shall return later—I probably shall not be able to offer the Committee very much help or guidance this afternoon, because those rates stand to be fixed in the 1973 Budget.
On the whole, though I appreciate the hon. Gentleman's objectives in putting forward his dual system of taxation, I cannot recommend it to the committee as being an improvement on the unitary system—the unified personal tax which my right hon. Friend put forward in his Budget Statement and which is now embodied in this part of the Bill. If the hon. Gentleman, having heard some of the arguments against it, is unwilling to


withdraw the Amendment, I shall have to ask my hon. Friends to reject it.

4.15 p.m.

Mr. Pardoe: I do not think that I wish to withdraw the Amendment, because I do not think that the remarks that the Financial Secretary has made were convincing or even terribly sympathetic, although I accept that he went out of his way, as is his custom, to be amenable.
The hon. Member for Barry (Mr. Gower) said that I was claiming too much for my proposal and was proposing a total simplification. The answer is that I am not. I accept that some complexities are inevitable in any just tax system. I am trying to remove complexities which are not inevitable. I believe that my proposal does just that.
The Financial Secretary says that the Chancellor says that there are two taxes under the present system. This is not so. I accept that the Chancellor claims that there are two taxes, but there are three. There is income tax, there is surtax, and there is the tax on unearned income. These are to all intents and purposes collected in different ways, at different times, by different criteria. For instance, the tax on earned income has allowances applied to it at the point of collection, whereas the tax on earned income has no allowances applied to it at the point of collection and they are claimed back at the end of the tax year.
Therefore, it is not true that the Amendment, far from reducing the present number from two to one, as the Chancellor is doing, would raise it back to two again. The Amendment would cut the present number of taxes on personal income, anyway, from three to two. I think that two are inevitable. In any case, I maintain that two is what the hon. Gentleman will be left with when the Bill goes through, because he will still have two taxes. He will have amalga

mated surtax, but he will not have amalgamated it into one tax. He will have amalgamated it into two taxes—one on earned income and one on unearned income. The distinction is still there and it will remain. The Chancellor's words in his Budget Statement about the method by which the two taxes will be collected differentiate them clearly and obviously.

I am grateful to the Financial Secretary for looking up my past speeches. He says that in 1969 I proposed four taxes. That Amendment was much wider; it dealt with the total reform of the tax system. This Amendment is limited to taxes on income. For instance, one of the four taxes I proposed in 1969 was a company tax. We are not dealing in the Clause with company taxation, so that one is out. Another of those four taxes was dealing, not with personal income tax or personal employment tax or personal property tax, but personal business tax. Again, to a large extent this is now amalgamated within various forms of company taxation. As I wanted to deal in the Amendment primarily and solely with income tax, I concentrated only on two.

The hon. Gentleman says that we have two taxes. I warn him that he will not have one. He will have two forms of income tax and he will have to introduce a whole series of complex and unnecessary allowances and amendments to these taxes in future to overcome the complexities which he is inherently introducing as a result of the proposal in the Clause.

For that reason, I certainly shall not recommend my hon. Friends to allow me to withdraw and I shall not ask the Committee to allow me to do that.

Question put, That the Amendment be made:—

The Committee divided: Ayes 4, Noes 170.

Division No. 367.]
AYES
[4.20 p.m.


Grimond, Rt. Hn. J.
Steel, David
TELLERS FOR THE AYES:


Johnston, Russell (Inverness)
Thorpe, Rt. Hn. Jeremy
Mr John Pardoe and




Mr Emlyn Hooson.




NOES


Amery, Rt. Hn. Julian
Balniel, Lord
Blaker, Peter


Astor, John
Batsford, Brian
Boardman, Tom (Leicester, S.W.)


Atkins, Humphrey
Bennett, Sir Frederic (Torquay)
Boscawen, Robert


Awdry, Daniel
Benyon, W.
Bowden, Andrew


Baker, W. H. K. (Banff)
Biffen, John
Boyd-Carpenter, Rt. Hn. John




Bray, Ronald
Hicks, Robert
Nabarro, Sir Gerald


Bruce-Gardyne, J.
Higgins, Terence L.
Onslow, Cranley


Buchanan-Smith, Alick (Angus, N &amp; M)
Hiley, Joseph
Osborn, John


Burden, F. A.
Hill, John E. B. (Norfolk, S.)
Owen, Idris, (Stockport, N.)


Butler, Adam (Bosworth)
Hill, James (Southampton, Test)
Page, Graham (Crosby)


Campbell, Rt. Hn. G.(Moray &amp; Nairn)
Holland, Philip
Page, John (Harrow, W.)


Carlisle, Mark
Holt, Miss Mary
Parkinson, Cecil (Enfield, W.)


Cary, Sir Robert
Hordern, Peter
Peel, John


Chapman, Sydney
Hornsby-Smith, Rt. Hn. Dame Patricia
Pounder, Rafton


Churchill, W. S.
Howell, David (Guildford)
Pym, Rt. Hn. Francis


Clark, William (Surrey, E.)
Howell, Ralph (Norfolk, N.)
Ramsden, Rt. Hn. James


Clarke, Kenneth (Rushcliffe)
Irvine, Bryant Godman (Rye)
Redmond, Robert


Clegg, Walter
James, David
Reed, Laurance (Bolton, E.)


Cockeram, Eric
Jenkin, Patrick (Woodford)
Rees, Peter (Dover)


Cooke, Robert
Jennings, J. C. (Burton)
Renton, Rt. Hn. Sir David


Coombs, Derek
Kershaw, Anthony
Roberts, Michael (Cardiff, N.)


Cooper, A, E.
Kilfedder, James
Roberts, Wyn (Conway)


Cordle, John
King, Evelyn (Dorset, S.)
Rost, Peter


Corfield, Rt. Hn. Frederick
King, Tom (Bridgwater)
Scott-Hopkins, James


Costain, A. P.
Kinsey, J. R.
Sharples, Richard


Critchley, Julian
Kitson, Timothy
Shaw, Michael (Sc'b'gh &amp; Whitby)


Crouch, David
Knight, Mrs. Jill
Shelton, William (Clapham)


Curran, Charles
Knox, David
Simeons, Charles


d'Avigdor-Goldsmid, Sir Henry
Legge-Bourke, Sir Harry
Skeet, T. H. H.


d'Avigdor-Goldsmid, Maj.-Gen, James
Le Marchant, Spencer
Soref, Harold


Dean, Paul
Lloyd, Rt. Hn. Geoffrey (Sut'nC'dfield)
Sproat, Iain


Dixon, Piers
Longden, Gilbert
Stodart, Anthony (Edinburgh, W.)


Dodds-Parker, Douglas
Loveridge, John
Stoddart-Scott, Col. Sir M.


Dykes, Hugh
Luce, R. N.
Sutcliffe, John


Eden, Sir John
MacArthur, Ian
Taylor, Frank (Moss Side)


Elliott, R. W. (N'c'tle-upon-Tyne, N.)
McLaren, Martin
Tebbit, Norman


Emery, Peter
Maclean, Sir Fitzroy
Temple, John M.


Eyre, Reginald
McMaster, Stanley
Thomas, John Stradling (Monmouth)


Fell, Anthony
Macmillan, Maurice (Farnham)
Tilney, John


Fenner, Mrs. Peggy
Maddan, Martin
Tugendhat, Christopher


Fidler, Michael
Madel, David
Turton, Rt. Hn. R. H.


Fisher, Nigel (Surbiton)
Marten, Neil
Vickers, Dame Joan


Fortescue, Tim
Mather, Carol
Waddington, David


Fowler, Norman
Maude, Angus
Walker-Smith, Rt. Hn. Sir Derek


Gilmour, Sir John (Fife, E.)
Maudling, Rt. Hn. Reginald
Warren, Kenneth


Goodhew, Victor
Mawby, Ray
Weatherill, Bernard


Gorst, John
Maxwell-Hyslop, R. J.
White, Roger (Gravesend)


Gower, Raymond
Meyer, Sir Anthony
Whitelaw, Rt. Hn. William


Green, Alan
Mills, Peter (Torrington)
Wiggin, Jerry


Hall, Miss Joan (Keighley)
Mitchell, Lt-Col. C. (Aberdeenshire, W)
Wilkinson, John


Hannam, John (Exeter)
Moate, Roger
Wolrige-Gordon, Patrick


Harrison, Brian (Maldon)
Money, Ernle
Woodhouse, Hn. Christopher


Harrison, Col. Sir Harwood (Eye)
Monks, Mrs. Connie
Worsley, Marcus


Haselhurst, Alan
Monro, Hector
Younger, Hn. George


Hastings, Stephen
Montgomery, Fergus



Havers, Michael
Morgan, Geraint (Denbigh)
TELLERS FOR THE NOES:


Hawkins, Paul
Morrison, Charles (Devizes)
Mr. Hugh Rossi and Mr. Keith Speed.


Hayhoe, Barney
Mudd, David

[Mr. PROBERT in the chair]

Mr. Joel Barnett: I beg to move Amendment No. 14, in page 26, line 23, leave out
'such amount as Parliament may determine' and insert '£50'.

The Temporary Chairman (Mr. Arthur Probert): Order. I understand that it is for the convenience of the Committee if we also take Amendment No. 18, in page 26, line 25, after 'rates', insert:
'not being less than ten per cent.'.

Mr. Barnett: These Amendments deal with the question of investment income and the way in which it will be taxed under the new system. Amendment No. 14 is a probing Amendment to see

exactly what the Government have in mind. It seeks to limit to £50 the slice of investment income which would be exempt from the surcharge. Amendment No. 18 would maintain a differential between earned and unearned income of 10 per cent., which is slightly more than exists now.
One of the reasons for our tabling the Amendment is that we are suspicious of the Government's intentions. They must have made some calculations of what they have in mind with the system. The Chancellor said on Second Reading that he would exempt from the investment surcharge a modest slice. He must have a figure in mind. If not, why use the word "modest"? We assume that he has a small figure in mind. But I should like to quote from paragraph 12(d) of the White Paper, "Reform of


Personal Direct Taxation", Cmnd. 4653, which is headed:
Incentive to savings.
Referring to the surcharge, the White Paper said:
By equating with earned income the tax treatment of investment income up to a certain level"—
not a "modest" level—
the incentive for personal savings will be materially increased".
That is very different from a "modest" exemption because, if there is to be only a modest exemption, presumably one will not be materially increasing the incentive. It is possible that the Chancellor's idea of what is modest and our idea of what is modest are not quite the same thing, but on the other hand he must have some idea of a figure to use the word at all.
4.30 p.m.
What I am really concerned about is that there seems to be, judging by the remarks of Ministers and hon. Members opposite, an intention to change a long standing differentiation between earned income and invested income. If the reason for doing so on a modest scale is for administrative purposes, because of the way the new unified tax structure works and the complexity of having the investment surcharge on modest sums, that is one thing; if, however, the purpose is a philosophical change in the idea of a differentiation between earned income and investment income, that is a different matter.
I want to refer to the differentiation between investment income and earned income and whether we should maintain the present differentiation. The Royal Commission on Taxation, which, as the hon. Gentleman said the other day, is the most authoritative work we have on the subject, considered this matter. There was a Minority Report with the Royal Commission's Second Report. I know that hon. Members opposite are not fond of the Minority Report because it was written largely by a professor whom they are not keen on. The Minority Report indicated preference for a greater differentiation, but I am not now going to argue for a greater differentiation. Because of the fondness which hon. Members opposite have for the Majority Report, I want to quote what it said

about differentiation between earned and unearned income. Paragraph 213 said:
The differentiation in favour of earned incomes was originally based on the fact that it is 'precarious'. Whatever the exact idea that this phrase is intended to cover—and it has been the subject of somewhat conflicting explanation—it is at least true to say of earned income in general that it has less stability of source than investment income and its receipt does depend, as the other's does not, upon the receiver being available to give services in exchange for it. It does not accrue without the contribution of his own effort, and the prospects of its accrual are therefore affected by such circumstances as age, sickness or other disability. It seems probable that in course of time other ideas have attached themselves to and become associated with this conception of precariousness. It has been pointed out that there is an element of expense involved in obtaining remuneration from work that is not present in the obtaining of income from investment. and at the same time cannot be completely allowed for by deductions for expenses in tax assessment. It has been said, further, that the State has a direct interest in offering some incentive to taxpayers to stimulate personal effort, even though it may be well not to forget that the State may have a direct interest also in securing that disincentives are not placed in the way of investment.
Paragraph 214 concluded:
We think that the idea of some differentiation based on these conceptions is a sound one.

Mr. J. Bruce-Gardyne: On the issue of precariousness, can the hon. Gentleman think of many forms of earned income which compare in precariousness with the investment income of one who happened to have his investment, for instance, in Rolls-Royce?

Mr. Barnett: Under a Government like the present Government it certainly would be precarious. I am willing to accept that, but I do not think that what the hon. Gentleman has said in any way diminishes the case of the authoritative persons of the Royal Commission. One perhaps does not want to be too controversial, so one will not say that the Government are deliberately allowing unemployment to rise; but they are not doing anything to see that it is reduced. Precariousness in employment has not been mitigated under the Government and the arguments adduced in the Report are as valid today as when the Royal Commission made them.
The Minority Report of the Final Report of the Royal Commission went further, and I want to quote it because


it is important. Paragraph 125 of the Minority Report said:
In our view there is a strong case for making some allowance—even though the cost cannot be precise—for the real cost involved in working as opposed to owning property; for recognising the fact that in performing work, a man, in the words of Adam Smith, 'must always lay down the same portion of his ease, his liberty, and his happiness'. Secondly, the monetary cost of acquiring knowledge and skill, which is fully analogous to the capital cost of plant and equipment, receives no recognition in the tax system, unless it be found in earned income relief.
These are very important points, as were the others I have quoted. A man gives up part of himself in his work and should be entitled to some differentiation for tax purposes between what he gets from his earnings and what he gets from his investment. The argument is surely irrefutable, and unless we are told by the Government that they are proposing a truly modest exemption for purely administrative purposes, I am afraid that there can be no other conclusion than that they are prepared perhaps at some later date to narrow the gap between earned income and investment income.
The only remaining argument on the question of greater relief for investment income is that of savings. No one can dispute that if we reduce the level of taxation on investment income we will induce a greater degree of saving. But there has been confusion about the whole question of incentives to help increased savings. Over the years, successive Governments have given a great variety of reliefs and incentives for savings, but these have largely been of the contractual kind of saving—life assurance, "Save as you earn" and so on—which have been strictly limited, such as the limitation on the number of premium bonds or National Savings certificates that one can hold. There has never been an across the board, blanket incentive for savings.
At present, with only a comparatively modest increase in the Budget in the incentives for savings, there has been a considerable increase in the amount of savings. According to figures last week, the amount of savings went up appreciably last month and during this past year. Some hon. Members opposite will claim that this is due to the incoming Conservative Government.

Mr. Gower: That is right.

Mr. Barnett: The hon. Gentleman says "That is right" but I would not be prepared to boast about that too much. My impression is that the reason why there is an upsurge in savings is nothing for the Conservative Government to be proud of. The reason is that there is fear and uncertainty about the future. In the normal way in inflationary times it is found that people prefer to buy products rather than have their money in savings losing value constantly. The reason why there is this increase in savings without any massive increase in incentives is primarily that there is this fear and uncertainty and lack of security, because for the first time ever there is this level of unemployment in the country with an underlying upward trend, as the Chancellor conceded.

Mr. Gower: Surely what the hon. Gentleman describes as fear of the future has traditionally led people to buy something immediately rather than make provision for an uncertain future with money which would lose its value. Is it not an indication that despite the difficulties at present, since the change of Government many people feel that there is a disposition to tackle the problem of inflation in the longer term?

Mr. Barnett: The point I was making was that people are uncertain and unsure of what will happen. They do not know what on earth to do. They have not had this level of inflation to cope with in the past. They are now frightened of what will happen and they are saving to a greater extent than in the past.
If I were the hon. Gentleman I would not boast about these increased savings because it cannot be argued that they stem from any massive new incentive. There was a small increase in incentives in the Budget but no massive incentive. It is therefore important, when considering the effect of changing the differential between earned and investment income on the grounds that it would increase savings, also to consider what it does in equity. The Royal Commission had something to say on this. In its final report, on the question of savings and what Government should do it said in paragraph 63:
We think that any tax preference based on personal saving must be weighed against this general principle on equity.


It went on in paragraph 67:
At any rate we can take as our starting point the view that the tax system, if it does give relief for saving, should aim at securing that whatever reliefs are given should be carefully controlled, so as to avoid the risk of relief for what is really delusive saving, and should be available to as wide a range of taxpayers as possible, so as to minimise unfairness in the ditribution of the benefit of the relief.
Paragraph 76 concluded:
If life assurance relief and the relief for national insurance contributions are retained, and if superannuation relief is developed to what we regard as its logical conclusion, we think that the tax system will be making as much concession to savings as it is reasonable or proper that it should. However desirable for economic reasons the encouragement of personal saving, measures adopted for its encouragement should lie outside the sphere of the income tax system, to the general equitable principles of which differentials measured by saving is not, as we have said, either easily or closely related.
It seems that the Royal Commission was absolutely clear. The argument for blanket encouragement of savings was completely ruled out. In these circumstances, if the argument for reducing the differentiation on the ground of savings is ruled out and if, as I believe, it has been ruled out on the grounds of equity, I hope that the Financial Secretary will be able to accept the Amendment as it stands. If he cannot accept the Amendment I hope he will at least assure us that he is not using this new system which, as he knows I welcome and have recommended for years, to change fundamentally the whole basis of our tax system.

4.45 p.m.

Mr. John Boyd-Carpenter (Kingston-upon-Thames): The hon. Member for Heywood and Royton (Mr. Barnett) has very fairly said that the first of these two Amendments was intended as a probing Amendment. Many hon. Members would sympathise with him because many of us would like to know with greater clarity what the Government have in mind. If the hon. Member were to carry his probe further to the extent of dividing the Committee on this Amendment he would be doing more than merely probing for information. He would be putting forward, and on that hypothesis voting for, a proposal which would really largely nullify one of the main merits of the Clause.
Certainly one of the attractive features of this Clause is the unification, basically,

of the tax on earned and investment income. If the point at which the surcharge is to be imposed comes as low as £50 a year the effect of that unification is very largely cancelled out. The Committee will note with interest whether, when my lion. Friend has given such information as he thinks fit to the Committee, the hon. Member sees fit to press this to a Division. If he does so then the hon. Gentlemen opposite should be quite clear that they will be voting substantially against the unification of the two lots of tax.

Mr. Dick Taverne: Could the right hon. Gentleman make this clear? Obviously the Clause is concerned to do something of which we on this side are in favour, to combine income tax and surtax. Secondly, it has the advantage of showing the real rate at which people pay tax on their earnings. Is he suggesting that these are not the main purposes in which he is interested, but that what he is interested in is abolishing the distinction between earned and unearned rates?

Mr. Boyd-Carpenter: I shall be coming to that in a moment. The hon. and learned Gentleman has admirably summarised part of the effect of the Clause. It is one of the major merits of the Clause that we begin with a standard or basic rate which is similar for investment and earned income. If the surcharge is imposed as ludicrously low down the scale as is proposed in Amendment 14 all that we will have done is to have reversed the earned income allowance and inserted the unearned income disqualification. In other words we would not have made a fundamental change but only in matters of presentation. This would be a very great loss.
The hon. Member for Heywood and Royton referred to the philosophy of the differential rates between earned and investment income. Like so many people who talk on this subject he seemed to imply that there was a clear-cut, fair and acceptable line of demarcation between the two. There is nothing of the sort. Let me take what in practical terms is the most important example of all. Most people save to provide for their old age in one way or another. If their saving is through an employer's pension scheme, when they draw that pension it is taxed as earned income.
If on the other hand a person has built up a small business, say a shop at which he has worked over the years, and when he becomes too old or too tired to operate it he sells it and lives on the proceeds, then the income on those proceeds —provision for his old age—is taxed as investment income. There is a distinction which if it is sharp in degree seems grossly unfair between those two people both of whom are in substance living on what they have earned to provide a comfortable old age. It is because the more the tax system is studied the more one becomes convinced of the arbitrariness of the line of demarcation between investment and earnings that one is forced to the conclusion that sharp differentials in tax become difficult to justify. The bigger the differential, the harsher the anomalies at the margin, the greater the unfairness. This is no reflection on the Inland Revenue. It is not possible to draw an ideally fair line between the two forms of income. This being so, it is important that the Committee should not seek to impose too sharp a distinction between the two.
The hon. Member for Heywood and Royton cited the Royal Commission. The argument that investment income is much less precarious than earned income excited a certain amount of derision among my hon. Friends. Shareholders in Rolls-Royce, V. & G. and the Mersey Docks and Harbour Board, as in many other concerns, are obviously in a more precarious position than a man with a skill who when he loses one job has a better chance of getting another than the shareholder has of getting his money back. Whatever may have been the position at the time the Royal Commission wrote, the argument of precariousness does not stand up now.
On the other hand, the argument about savings is very important. It has always puzzled me to know where the Labour Party draws the line of demarcation between the virtuous contributor to National Savings who puts by a little each week to build up his savings, and the wicked capitalist speculator who should be severely taxed for having investment income. I am not sure at what point in the scale one passes from virtue to evil.

Mr. Barnett: Mr. Barnett I know the right hon. Gentleman is not as naïve as he is

making out. He must know, particularly with his experience of the Treasury, that there is a difference between contractual saving and, as the Royal Commission pointed out, the delusion of savings which are not real savings at all.

Mr. Boyd-Carpenter: Of course there is a difference between contractual and other savings, but it has been the policy of successive Governments to encourage small savings, whether on a contractual or any other basis. No Government to my knowledge has said that contractual savings were the only savings of merit and value. With respect, it is the hon. Gentleman who is being naïve. Successive Labour Chancellors of the Exchequer made passionate appeals for savings. They spoke of the National Savings Movement and they spoke at the Dispatch Box urging people to save, and rightly. It is quite inconsistent for hon. Gentlemen opposite to say that at a fairly early stage in the savings scale those who have responded to that appeal suddenly become people who, as a matter of philosophy, should be penalised by a discriminatory system of taxation.
The hon. Member for Heywood and Royton, with his ingenious red herring of the reference to contractual savings, knows perfectly well he has not answered that point. It surely must be plain common sense that if one taxes specially highly the incomes from people's savings one makes saving less attractive and spending more attractive. It becomes less agreeable to put money by and more attractive to spend it. The hon. Member tried to take my hon. Friends to task for their enthusiasm over the increase in savings under the present Government. He said that this was due to uncertainty. To some extent the converse is true. Under the Government he supported there was no uncertainty; there was absolute certainty that if a person saved the value of his savings would be eroded by a substantial percentage each year. That no doubt is the reason why people did not save under the Labour Government and why they are saving now.
The hon. Member for Cornwall, North (Mr. Pardoe), who has retired with his Liberal friends, no doubt to celebrate their triumph, in the previous debate argued that an increase in savings did not make for economic growth. It is an interesting theoretical point, but in


this context it is not the argument for savings. The argument for savings has a much closer relevance to taxation than that. Every Chancellor of the Exchequer in my recollection has always said that the more savings increased the less tax he needed to impose. The reason is obvious from the point of view of management of the economy. If large amounts of people's earnings are abstracted from consumption and put into savings, the need to abstract further money by way of taxation is reduced. This was the vicious circle which the previous Govment got into. By their high taxation on savings they discouraged savings, and that very discouragement with the subsequent fall in savings gave at least a plausible argument for further increases in taxation which further diminished savings. That was the vicious circle to which the country was subjected under the previous Administration.
There is, therefore, a powerful argument in economic and fiscal terms for not merely specific measures but general measures to encourage savings. The best general measure to encourage savings is to move towards a greater equality in the level of taxation upon savings and upon earnings, and not to indulge in increasing discrimination against savings.
It is because it is generally believed outside that my right hon. Friends have a more practical approach to the taxation of savings that savings are now increasing. if the Amendment is intended seriously apart from being a probe—and as a probe it may have no more success than the American attempt to send a probe to Mars—it should be strongly resisted on grounds both of equity and of economic sense. The grounds of equity are that a sharp distinction—given all the marginal cases, all the anomalies in the distinction between earned and investment income—makes for great unfairness between one taxpayer and another. The economic grounds are that high and specific discriminatory taxation of savings discourages savings, and so causes successive Chancellors to tax the citizen more highly than would otherwise be necessary. I hope, therefore, that the Committee will reject the Amendment.

Mr. R. T. Paget: The right hon. Member for Kingston-upon-

Thames (Mr. Boyd-Carpenter) has put up some peculiar arguments. When my hon. Friend the Member for Heywood and Royton (Mr. Barnett) said that earnings were a more precarious form of income than investment, there were howls of "Rolls-Royce" from the other side. Did it occur to hon. Gentlemen opposite that when a great firm like that goes it is not merely the investors who lose but the people who are employed by that firm? Whereas the investor, if he has any sense, does not have all his eggs in one basket, the unfortunate employee has to.
The right hon. Member for Kingston-upon-Thames said that naturally people did not save under a Labour Government because their savings were eroded. This is an astonishing statement. I do not say this to the credit of the Labour Government, but during the period of Labour Government the rich got richer quicker than at any other period in the history of mankind. Never has one seen unearned possession rewarded to the degree it has been of recent years. It is true that the unfortunate widow with a public trustee who did not take much trouble and put her money into gilt-edged did very badly, as indeed did Government pensioners. But those who invested in the investment trusts, whose administrators and creators are so strongly represented on the Government Front Bench, did marvellously.

5.0 p.m.

Mr. Christopher Tugendhat: The hon. and learned Gentleman is right that during the Labour Government the rich grew richer to an unprecedented degree. which is surprising. But the object of this Clause, and the thing for which hon. Members on both sides of the House are striving, is not to help those people with enormous inherited wealth, but precisely those people who are saving out of income. Those are the people, be they professional or blue collar workers, who did badly under the Labour Government. These are the people who stand to gain as a result of this Clause.

Mr. Paget: The people who saved out of their incomes and earnings were not those who had blue chip investment trusts to provide for them. On the contrary, they were humble working people who from the savings which they had been


able to make out of ordinary wages and a little sense are now quite rich and who not only may own houses but probably own several. Among the wonderful investments which come from unearned possessions the rewards of simply owning a property are considerable. If shares have climbed, then property has climbed even higher.
I feel that the distinction between earned and unearned income ought to be increased rather than diminished. None the less, I agree with the difficulty of drawing the line at what is the sort of earned income which is too heavily taxed and the sort of earned income which is not taxed at all. The ordinary wage earner, who works throughout his life and who in that process is wearing himself out, is not entitled to charge depreciation in the same way that I can charge depreciation for a cow. This is the problem one is up against. Within business depreciation can be charged for the wearing out of an asset. In regard to earned income, unjustly, no such kind of depreciation can be made. In the actual cost of earning a wage, even in respect of travelling to work, one cannot knock off such items because there is no allowance for them, but at the higher level of earnings an expense account becomes far more important than a salary. At the top levels of expenditure the man who can get away with an additional £500 expense allowance is far better off than the man who gets a rise of £5,000 in salary.

Mr. Boyd-Carpenter: Does not the hon. and learned Gentleman appreciate that it is precisely that tendency or temptation to rely on tax-free expenses as opposed to increased earnings which is one of the unfortunate and wrongful consequences of too high a level of taxation?

Mr. Paget: No, I would not say that at all. I would say that it probably is one of the results of taxation wrongfully directed, and that one should be much more careful where one gives earned income allowances. Allowances should be larger for the people who cannot charge depreciation and to a great degree cannot charge expenses. They should be very much less for the people who can charge very large expenses and who, in the form of compensation for loss of employment, also get something which is

equivalent to a highly generous depreciation allowance.
This is where we should look at the distinctions. I do not know whether I have brought this matter within the Amendment, because I may have gone a little wide. However, I was tempted to do so by the remarks of the right hon. Member for Kingston-upon-Thames, and I have gone no wider than he has.

Mr. Tugendhat: I agreed so much with what was said by my right hon. Friend the Member for Kingston-upon-Thames (Mr. Boyd-Carpenter) that I was in some doubt about whether to make a contribution, but I found myself in so much disagreement with the two distinguished contributions from the Opposition benches that I feel that it is important to emphasise the arguments in favour of this Amendment. It is of the utmost importance that the exemption should not be set too low, otherwise we shall nullify the whole purpose of the Clause and might just as well not have it.
What hon. Members opposite overlook is that it is important to draw a clear-cut distinction between earned and unearned income. For the vast majority of people their savings income represents income on savings which they accumulated as a result of working. Therefore, there is a clear temptation for anybody who works for his living, and who does not have inherited wealth or vast private wealth behind him, to spend rather than to save. It is always necessary to reward those who save rather than those who spend.
I agreed with the hon. Member for Heywood and Royton (Mr. Barnett) that to some extent work limits the liberty of the individual. That is one of the reasons why my hon. Friends and I are in favour of a lower rate of direct personal taxation on earned income. But that is not what we are talking about here. When people work and save, it is important that those savings should be encouraged and should not be discriminated against. It is not true to say that there is some sort of certainty about savings income and that because it is so safe it should be taxed at a higher level.
The hon. Gentleman made a fair point about Rolls-Royce as involving the collapse of a great company which a few


year ago could never have been foreseen. A similar point could be made about the Mersey Docks and Harbour Board collapse, which again could not reasonably have been foreseen. But the implications go wider. The Financial Times Index, which is the best indication of these things, shows that over a period of four years the index has varied from 280 to 520, and then back to 305. In other words, for people who have invested in stocks and shares on the Stock Exchange and who have avoided the collapse of Rolls-Royce, the Mersey Docks and Harbours Board and indeed of V. & G. and any other special situations, there have been immense variations.

Mr. Barnett: The hon. Gentleman should remember that the lifetime of a worker is far greater than four years. Would he therefore make his comparison on the Financial Times Index in relation to the lifetime of a worker?

Mr. Tugendhat: I am not arguing that employment is a certain occupation for anybody, whether lie works on the shop floor or is an executive. We must remember that the present level of executive unemployment is running at 70,000 or 80,000, which supports the argument that employment itself is not a certain form of income. I am saying that investment is not certain and should not be regarded as such. I appreciate that four years is not a very long time.
Since the hon. Member for Heywood and Royton regards it as an inadequate time span, perhaps I might dilate further on the point. Going back to the base year of the Financial Times Index, in 1935 it was of course 100. Today, it is in the upper 300s, although recently it was 305, and who is to say that it will not again reach 305? But even if we take it in the upper 300s and consider the people who invested on the Stock Exchange in 1935, the increase cannot be very much. Even if they have done as well as the index, they have not done terribly well, and their investments can by no means be regarded as certain.
My reason for taking a span of about four years is that many people who save out of income and do not have the benefit of expert professional advice or accountants, trustees, or any of the other paraphernalia about which we have heard, are very likely to put their money

into blue chip companies like Shell, Unilever, I.C.I. or British-Leyland. Merely by looking at the performance of those shares, one sees that they can swing by amazing amounts. At one time in the last few years, Shell was down to about 35s. It has been up to £5. It has come back again.
It is true that four years is not a long time span, and I can see that my argument is not going home as I would wish among right hon. and hon. Members opposite. But when someone puts money by, he does not do it in order eventually to take it out in 15, 20 or 25 years. He puts it by for the time when he needs it. If the time comes when he wishes to buy a house, or a new car or he has to meet some other large expense, and he finds that his investment in a blue chip company has dropped by 50 per cent. in the 2½ years since lie put his money in, it is a catastrophe for him.
It is most important for people to realise that investment in stocks and shares and in any of the other media depending on stocks and shares, such as unit trusts, investment trusts and other forms of savings which are geared to the performance of stocks and shares, is far from certain. Many people who put their money into unit trusts in the not too-distant past find that their savings have collapsed—

Mr. Barnett: The hon. Gentleman is answering a case that I was not making. I did not say that investment income was certain. I was making the case, which the lion. Gentleman has not answered, that there is a greater degree of uncertainty and precariousness in earned income than in investment income.

Mr. Tugendhat: My point is that investment income is not in some peculiar degree certain, therefore justifying a higher rate of tax. It is true that there is a high level of unemployment by postwar standards. Notwithstanding that, it is fair to argue that the great majority of people spend the bulk of their working lives employed.
The only point that I emphasise is that any argument suggesting that investment income should carry a higher rate of tax simply because it is in some way more certain is invalid. Indeed, the uncertainty about employment emphasises the need to help people to save. If people become unemployed, that is precisely when they


need their savings. If their savings collapse as the result of the sort of situation that I have discussed, they are in a far worse position.
It is of the umost importance that the exemption limit should not be set too low. We should not be dazzled by what happens to the very rich. Certainly they stand to gain. However, the people whom we are trying to help are those who save out of income, and the more uncertain their careers, the more necessary it is to encourage savings and not to discriminate against them.

5.15 p.m.

Mr. Tam Dalyell: Listening to the right hon. Member for Kingston-upon-Thames (Mr. Boyd-Carpenter) and the hon. Member for Cities of London and Westminster (Mr. Tugendhat), my mind strayed to a deserving, hard-working old couple in Kingston who had used their efforts of 40 years to invest in Vehicle & General, Rolls-Royce and the Mersey Docks & Harbour Board.

Mr. Boyd-Carpenter: They would not have done so if they had had the good sense to seek the advice of their Member of Parliament.

Mr. Dalyell: If they had gone to their Member of Parliament, I have no doubt that the right hon. Gentleman would have advised them to spread their portfolio in all circumstances. Are we talking about reality, therefore? Almost everyone spreads any portfolio, and this rather invalidates the hardship argument. This only emphasises how often we argue from the standpoint of some extreme and unlikely case of hardship in order to draw general conclusions.

Mr. Tugendhat: The hon. Gentleman is doing me an injustice. I said that Vehicle & General, Rolls-Royce, and Mersey Docks & Harbour Board were quite exceptional cases, and I emphasised that I was talking about ordinary people who invested, taking the Financial Times Index as a guide and pointing out how that has fallen from 520 to 305 in a short space of time. There are many people in our constituencies who have come unstuck as a result of that.

Mr. Dalyell: My hon. Friend the Member for Heywood and Royton (Mr. Barnett) prompts me to ask how many

ordinary people there are in the hon. Gentleman's constituency.

Mr. Barnett: Only me!

Mr. Dalyell: Anyway, let us leave these irrelevancies.
I am in some ignorance, and on this occasion, for once, it is not entirely my own fault. I am baffled to know what the Clause is about. I believe that we are entitled to hear an explanation from the Financial Secretary.
If this is a matter simply of administration, I can understand it. But I should like to hear what precisely is involved in terms of Inland Revenue staff time. My suspicion is that there are very important administrative considerations here. Is this a matter of fiscal or economic policy, or is it simply one of staff time and of the administrative problems of the Inland Revenue? Through you, Mr. Probert, I ask that we be given the opportunity to hear the Financial Secretary fairly soon, so that he may clear up our ignorance.

Mr. Bruce-Gardyne: The hon. Member for West Lothian (Mr. Dalyell) said that he was baffled, and I think that probably we can all agree with him about that. Certainly he gave no answer to the main burden of the argument advanced by my right hon. Friend the Member for Kingston-upon-Thames (Mr. Boyd-Carpenter), whose primary concern was not with that foolish constituent of his who did not take his advice on where to place his investments, and so landed up with shares in Vehicle & General, Rolls-Royce, and the Mersey Dock & Harbour Board, but with one individual involved in a contractual saving scheme, who received a pension at the end of the day which was counted as earned income, compared with the other individual, who was unable to do that because of the nature of his employment, and who, instead, sold the small business in which he was engaged and had no choice but to invest the proceeds to provide an income for his old age, only to find that that income was treated as investment income. That is the distinction which my right hon. Friend was making, and the hon. Member for West Lothian did not deal with it.

Mr. Paget: The hon. Gentleman referred to the man who builds up a business and sells it when he gets too old to run it. Does he say that spending that capital money is taxed? Of course it is not. All that is taxed is the interest that he gets on it.

Mr. Bruce-Gardyne: With respect, the hon. Gentleman has not got the point. The equivalent to the man who simply receives a capital sum for his business and then spends it is the man who has been in employment all his life and who receives a capital sum on his retirement and spends it. The true distinction being made by my right hon. Friend was between the man who got a pension from his employer when he retired, which he received as earned income, and the man who was unable to have any pension scheme because of the nature of his employment and had therefore to rely on his income from the capital savings which he had made and invested, which was his equivalent to the pension, but which was treated as investment income, and suffered the surcharge, and not as earned income, which escaped it.

Mr. Paget: The chap who sells is much better off.

Mr. Bruce-Gardyne: On the contrary, he pays the surcharge.
I want to deal with a slightly different aspect of the argument. We have heard tonight about the desirability or otherwise of a distinctive treatment of investment income for tax purposes from the point of view of encouraging savings. The hon. Member for Heywood and Roy-ton treated us to a learned disquisition from the Reports of the Royal Commission on Taxation and waxed unnecessarily irate when we suggested that investment income was more precarious than the Royal Commission seemed to recognise. That was the only point being made on that. I believe that there is a strong case for at any rate substantially reducing the element of discrimination in our tax system against investment income. That concerns the impact which high taxation on investment income has on the management of public companies.
It is at least arguable that one reason that we often have a management performance in public companies in this

country which would not be considered of a high standard in countries with a more vigorous capitalistic system—for example, the United States—is precisely that we make such exaggerated efforts to dissociate owners from the companies which they own. One of these exaggerated efforts is the excessive discriminatory taxation of invested income.
I am very much in favour of militant shareholders. We could do with many more. I was delighted to see Mr. Clive Jenkins buying his way into various companies and turning up at their annual general meetings. I wish that there were more shareholders like him. Far too many managements have assumed unto themselves the right to manage their companies in their own ways with precious little regard to their obligations towards the owners or the rights of those owners.
I remember Lord Melchett, shortly after he went to the British Steel Corporation, saying that he did not think that going into a nationalised industry made all that much difference to the management; it was simply a different name on the share register. In the light of recent events, he might perhaps take a slightly different view. Indeed, I am tempted to argue that it is in the nationalised industries where management can be obliged to be more responsive to ownership than in private industry. I should like to see managements becoming more responsive. I do not see much prospect of that so long as we maintain such a discriminatory system of taxation against investment income and dividends to the owners of public companies.
I was a little shattered the other day to read of another individual case. An eminent former civil servant, Sir Leslie Rowan, who has presided over the destinies of Vickers for the last nine years, is now retiring. Under his guidance Vickers has become a fixed-interest security. There has been no improvement in the dividend over those nine years. There has been a substantial drop not merely in the real price of the shares in terms of their relative market value but in their absolute price. Sir Leslie is now buying himself out with a substantial increase in salary.
That would not happen in, for example, the United States which has a more aggressive capitalistic system and


does not indulge to the extent that we do in discriminatory taxation of invested income. I do not suggest that the degree of discrimination which we apply against invested income is the only factor. There are other factors, largely introduced by the previous Government. For example, there is corporation tax, which divided the company from its shareholders with its particular bias against distribution which my right hon. Friends are planning to correct. I do not think that it can be disputed that one element in this pattern of divorce between the managements of public companies and their owners is the way that we tax investment income.
I was interested that the hon. Member for Heywood and Royton quoted the minority report of Professor Kaldor on the case for a greater degree of discrimination. The hon. Gentleman has overlooked that that is what we have done. When the present Chancellor raised the level for the starting point of surtax, he applied it only to earned income, not to unearned income. In so doing, he actually increased the degree of discrimination against investment income.
I, like my right hon. Friend the Member for Kingston-upon-Thames, welcome the Amendments as probes, but I hope that, as sometimes happens to probes, when my hon. Friend replies hon. Gentlemen opposite will find that their probes produce a discovery precisely the opposite of their hopes and expectations.

[MISS HARVIE ANDERSON in the Chair]

5.30 p.m.

Mr. R. B. Cant: Hon. Members on both sides are always trying to find simple, if even radical, solutions to our problems. I am surprised that the hon. Member for South Angus (Mr. Bruce-Gardyne) believes that there is much relationship between the quality of management and our economic performance when considering the taxation of invested income. If that were the case, I think that any Government would put the matter right tomorrow. I believe that the people might be willing to accept a degree of inequality in income distribution if we could achieve that objective.
I believe that our problems are more deep rooted than questions of money supply, the level of taxation, or any other fiscal, monetary, macro or economic device we might seek to lay our hands on from time to time. It will take us more than a decade—perhaps even entry into the Common Market—before the quality of our management and of a lot of other things which are wrong with British industry can be put right. We have to dimiss this argument. Otherwise, reading some of the accounts of the distress of British managers, we might feel tears coming to our eyes.
I read in The Times a day or two ago about the terrible plight of British management because Germany had revalued. I wondered how this could affect British management. It has probably put up the cost of the Swiss education of the children of Britain's management. This is terrible if management itself has to bear the cost.

Mr. Tugendhat: The Gentlemen to whom the article referred were mostly Americans and continentals. It did not mention Britishers, but people running British companies. They were foreigners working for foreign-owned companies.

Mr. Cant: I am sorry, I do not normally rely on other Members reading The Times with the same toothcomb as I do. Arguments of that sort—and it is one of a species of a fairly extensive genus—almost reduce me to tears at times. I almost seek membership of the Finance Bill Committee each year in order to have my Socialist convictions reinforced. Obviously we live in different worlds, and speak different languages, and nothing brings that out more forcefully than discussions of this kind.
Coming back to the general problem of the taxation of earned and unearned income, hon. Gentlemen opposite obviously believe that the two are the same, and that there should be no element of discrimination in the taxation of unearned income. My hon. Friends on this side of the House, and the people whom we represent at the grass roots, do not think in that way. Possibly they are wrong. Possibly their philosophy is something that they should put right at some time, and if they had a sudden excess of wealth no doubt they would think differently.
The nub of the problem lies in the point made by the hon. Member for the Cities of London and Westminster (Mr. Tugendhat), and that is the taxation of new savings on the one hand and, on the other, the taxation of accumulations of wealth. If one believes that saving is a function of the rate of interest, or the level of taxation, or even the rate of inflation, that is one thing, and if one wants to generate a flow of savings, for whatever reason—to feed investment or to reduce the burden of taxation in any year—that is all right. But this is entirely different. The Government are preempting a great deal of the national income each year to prop up the standard of living of people who have inherited vast fortunes.
The ideological differences between us are confirmed by statements of the kind that we have heard, and I repeat that trying to encourage savings by tax reliefs is an entirely different proposition from distributing largesse on the grand scale that goes on in this country to people who happen, by some force of circumstances—because they were born into some bed, or married into some bed—to be considered worthy of some sort of benefit.
The problem is that one cannot distinguish between the two, and this is the problem of the margin for all economists. One may like to reduce or increase prices for marginal output, but it cannot cannot be done. If prices are reduced or increased, they are altered for every unit that is being sold. Similarly, the Chancellor of the Exchequer is faced with this problem. This is a probing Amendment. The figure of £50 was no doubt drawn out of the air at some time, but hon. Gentlemen opposite simply will not convince the people of this country that there is an entitlement to any further concession in respect of the taxation of unearned income. It was not very scientifically dubbed "unearned income", but that is how people regard it, and I think that basically they are right to do so.

Mr. James Ramsden: The hon. Member for Haywood and Royton (Mr. Barnett) said that he wished to keep a sharp distinction between unearned and earned income, and the hon. Member for Stoke-on-Trent, Central (Mr. Cant) pressed the same point of view. My excuse for intervening in what has been an

interesting debate is that during the Second Reading debate on the Finance Bill of 1955, in one of the first half-adozen speeches that I made in the House, I broached this argument—which has not featured all that much since in our financial debates—and argued in an opposite sense to that argued by the hon. Member for Heywood and Royton, that we ought to narrow, if not abolish, this distinction altogether. That point of view would commend itself to a number of my constituents—many of whom are retired—for the reasons advanced by my right hon. Friend the Member for Kingston-upon-Thames (Mr. Boyd-Carpenter) because, to somebody living on an income which is the result of a lifetime of saving, the anomalies inherent in the present distinction are very conspicuous indeed.
I hope that the Minister who is to reply to the debate will tell us something that has not emerged so far—what would be the extra cost were the distinction to be abolish? It may not be possible for the Minister to give an answer to the question framed in those terms, but if he could in some way quantify the cost it would be of assistance to the Committee.
I was rather disappointed that my right hon. Friend the Chancellor of the Exchequer went out of his way to say that this year he was going to keep the distinction between the treatment of earned and unearned incomes. From a taxpayer's point of view, the state of affairs proposed in the Bill may be all right so long as we have a Government who believe, in general, in fairly low levels of personal taxation and, in particular, if we have a fairly large slice over which the treatment of earned and unearned income is the same.
So long as we have that sort of Government, the anomalies will not be so apparent, and the unfairnesses will at any rate be tolerable. What I am afraid of is the handle which the new system introduced by my right hon. Friend may give to a future Government if they are determined to use high rates of personal taxation in a punitive and redistributive way.
There have, in the past, been pressures in that direction. The brake on those pressures has always been that, with a single rate of surtax on both unearned and earned income, there has been a certain reluctance to bear hardly upon


earners, however high their earnings. That has always acted as a restraint against Governments who have been tempted to go in for high rates of taxation. Under the system proposed by my right hon. Friend that restraint will not operate in quite the same way. Thus, while I welcome the simplification introduced by the new scheme, I am apprehensive about it. I hope that what has been introduced this year is the start of a move which may end up even further in the direction advocated by my right hon. Friend the Member for Kingston-upon-Thames.

Mr. Charles Loughlin: I am always amazed by the plea for all these industrious people who benefit from unearned income. In the economic situation of the last 12 months there seems to be some virtue in a person receiving an increased income or tax relief provided he does not lift a finger to secure it but only invests.
Right hon. and hon. Gentlemen opposite have made this plea as though the people concerned have great virtue because they invest. These people do not lift a finger to get increased dividends or tax relief. Yet when people in industry work their guts out for 52 weeks a year and apply for increased wages, the very same hon. Members say that there is something wrong in that, and that people who work for a living should not have increases while those who do not lift a finger to create the wealth can have not only increased dividends but also tax relief.

Mr. A. E. Cooper: I am surprised at the hon. Member for Gloucestershire, West (Mr. Loughlin). We have heard a lot of nonsense talked by him over the years but rarely as much as he has just talked. Investment, basically, is the surplus from a person's income compared with his expenditure. It comes from that and that alone. If a man earns £2,000, £3,000 or £5,000 and can put aside £100 or £200, he has earned that money.

Mr. Paget: And if he is lucky enough to back the winner of the Derby?

Mr. Cooper: He could equally fall off a horse, could he not? The investment comes from individuals or companies or

trusts, from the surplus over their expenditure. If a man is prepared to save, it is money which he has earned and which he wishes to take up in future. One cannot say in ten years that that was not earned money.

Mr. Loughlin: rose—

Mr. Cooper: Please—the hon. Member spoke for 45 minutes yesterday and told the House nothing. Every hon. Member is entitled to a fair crack of the whip. He should not keep seeking to give us the wealth of his knowledge, which frankly is minimal.
The distinction between earned and unearned income is wrong: there should be income and that is all. There are exceptions, of course. A man may win £100,000 or £200,000 on the football pools and this can be regarded as unearned income, but such cases are a very small percentage. The savings and investment of the nation are the difference between expenditure and income of individuals.

5.45 p.m.

Mr. William Hamling: I thought that the context of the Government's economic message for the last 12 months has been rewarding effort. I wonder whose effort we are rewarding in this Clause—

Mr. Cooper: Charles Loughlin's.

Mr. Hamling: If my hon. Friend made a speech lasting 45 minutes, that was certainly not unearned increment.
The message of the Clause is that the Government are rewarding not effort but non-effort. They are not pleading that their purpose is to help those who are the most active in the community. Are we going back to the days when unearned income was regarded as synonymous with earned income? That is surely this Government's tendency, although, as in so many things, they do not have the courage of their convictions, and do it only in a small way, rather like Topsy. Their defence, I suppose, is that this is only a small measure. But surely, if they had the courage of their convictions, they would go all the way in this argument for changing attitudes which have been traditional since the days of Lloyd George, and remove the distinction altogther.
The hon. Member for Ilford, South (Mr. Cooper) suggested that to him there was no distinction between earned and unearned income, that all unearned income is the result of past effort—

Mr. Cooper: Hear, hear.

Mr. Hamling: Of whose effort?

Mr. Cooper: The person's.

Mr. Hamling: Hardly. But that is the logic of the hon. Gentleman's argument, and I respect his logic. It is a shame that his own Front Bench are not so attached to their logic. Although this argument is logical, we do not accept it. It has not been accepted in this House for over 60 years. This Government are determined to turn the clock back, as I said on Second Reading, not merely to the 'thirties and the means test mentallity but to the pre-1906 era. They are going back to the philosophy of the 19th century of rewarding abstinence.
It does not strike me that the people who are in the ranges of income to which the Clause will apply have, in large measure, been conspicuous for their abstinence. In fact, they have been conspicuous for their expenditure. This is not a reward for lifetime savings. The Government are rewarding people not for having saved but for getting money for neither toiling nor spinning. Somebody else did that for them and the results have been passed on to them. That has been the story of unearned income in this country for well over a century.
This Government do not believe in rewarding effort. Certainly this Clause is not of that order. It is rewarding noneffort—the results of someone else's savings that have been passed on, either to sons or daughters, or, judging from last week's debate, to grandsons and granddaughters. The reward being given here by the Tories and the reward given by previous Tory Governments goes to youngsters aged between 21 and 25. Their non-effort is being rewarded by this provision, and we reject it.
We have heard from the benches opposite about punitive taxation. We have also heard many echoes from the past. This has been an evocation of all the debates that took place on the Lloyd George Bills. The same arguments have been trotted out, but by the grandchildren

this time. In other words, the descendants of the 1910 Tories are here in force trotting out the same petty arguments to protect privilege. Certainly the Tories are not carrying out their election pledge to reward effort.

Mr. Patrick Jenkin: It may be a comfort to the hon. Member for Woolwich, West (Mr. Hamling) to know that my grandfather was a Liberal. However, my mother was wiser—and I am a Tory.
I rise not in any sense to curtail the debate, because I know that a number of hon. Members on both sides are anxious to speak, but in response to the hon. Member for West Lothian (Mr. Dalyell), who I regret is not in his place, to give an indication of the Government's attitude to the Amendment and thinking on the issue that has been discussed.
It is doubtful whether what I have to say will be of much comfort, and certainly of much enlightenment, to hon. Members on either side, for the reasons I shall explain. First, to put the matter in its proper context, I will comment on the nature of the whole reform embodied in this part of the Bill, and there is a great deal of support on both sides for what we are doing.
In his Budget Statement in April, 1969, the right hon. Member for Birmingham, Stechford (Mr. Roy Jenkins) said, after speaking of his reform of income tax, which was an alteration of personal allowances:
As part of this change I would greatly have liked to separate off the effective earned income rate, that is to say to show the actual percentage of tax paid on earned income. This would be a good deal easier to understand than the present system under which effect of the standard and reduced rates is substantially lessened by the earned income relief. Unfortunately, despite intensive effort, this proved to be quite impossible without imposing a very considerable administrative burden on the Inland Revenue."—[OFFICIAL REPORT, 15th April, 1969, Vol. 781, c. 1030.]

Mr. Barnett: I remind the hon. Gentleman that we were to have a debate on the Clause stand part later and that, at this point, we were to have a rather narrow debate on the Amendment.

Mr. Jenkin: I appreciate that, and I am anxious not to widen the debate too far. I was hoping to explain why I shall not be able to give an indication of what the starting point and the rate of


the investment income surcharge will be. Perhaps, as I develop my argument, the position will become clear.
My right hon. Friend was able to put exactly that reform—it may not have been exactly what hon. Gentlemen opposite would have done, but it achieves the same objective—into effect, partly because it was done in the context of reducing the burden of taxation, and things become more possible in that context, and partly because we were prepared to look forward two years and to spread the administration of the reform over two years, and at the same time to be prepared to justify our decision to announce certain rates and levels of taxation in the budget of 1973.
Indeed, there is no other way in which this could have been done. It would not have been possible for any Government to have undertaken the major administrative work that needs to be done and. at the same time, to have announced the rates. It is because one must do it in stages, and therefore inevitably introduce legislation in one year and in the subsequent year announce the rates, that it has become possible to do it, and this is the price that one must pay for doing it.

Mr. Robert Sheldon: Does the hon. Gentleman recall the comparative situation in 1964 when, on the introduction of corporation tax, an indication was given then of the rate, although the legislation was introduced subsequent to the announcement? Cannot the hon. Gentleman go as far as the then Chancellor went in 1964?

Mr. Jenkin: No. When dealing with the whole structure of personal taxation and the major reform which this represents, it is not possible to do that. In this sphere the reform has such an impact on demand management that it would have been impossible for my right hon. Friend in any sense to have committed himself as to the higher rates of tax, the starting point for the investment income surcharge or the level of the surcharge.
I appreciate the disappointment which must be felt by hon. Members on both sides of the Committee, but I must ask them to accept this position. We are looking two years ahead and we are leaving 'the rates to be fixed in 1973.

Mr. David Marquand: Leaving aside the question of rates, which is a different matter and with which the Amendment is not concerned, when the Chancellor used the adjective "modest" about the extent of investment income that would be taxed at the same rate as earned income, he must have had some notion in his mind of what the amount might be. Would the hon. Gentleman care to spell it out?

Mr. Jenkin: The hon. Member for Heywood and Royton (Mr. Barnett) referred to that at the beginning of his speech, and I shall be coming to it shortly.
It might be helpful if, first, I commented on the figure of £50 mentioned in the Amendment. It is estimated that there are about three million individuals within the tax net who have investment incomes above £50. As the hon. Member for Heywood and Royton said, both in the Budget debate and on Second Reading, clearly the administrative problem is one factor which we very much have to bear in mind, because when anybody has investment income, it requires an assessment made upon him to assess this to the surcharge and, if relevant, to any higher rates.

6.0 p.m.

Mr. Barnett: This is the crucial point. As the hon. Gentleman will have heard from the debate, almost all his hon. and right hon. friends were not making the case on administrative grounds. I hope that he will answer the point about whether the Government are thinking of the exemption for investment income on administrative grounds, as the Chancellor implied in his word "modest", or on rather wider grounds of giving greater exemption to investment income.

Mr. Jenkin: That shows the unwisdom of giving way too frequently. One is asked about matters concerning which one is about to speak. I must ask hon. Members to allow me to make my speech in my own way.
On the Amendment, the Government do not wish to be constrained, and if the Opposition insist on taking it to a Division, I hope that the Committee will reject it.
I do not want to get too involved in some of the philosophical arguments about the distinction between investment


income and earned income which have formed the greater part of the debate. There is a differential. It has existed, as the hon. Member for Woolwich, West said, for a great many years. Some of the reasons which prompted its introduction are perhaps not relevant today, but it exists.
My right hon. Friend the Member for Harrogate (Mr. Ramsden) asked me what it would cost to get rid of it altogether. This was the subject matter of a Question by my hon. Friend the Member for Pudsey (Mr. Hiley) on 27th April, when my hon. Friend the Minister of State for the Treasury gave the answer:
About £250 million on the basis of 1970-71 figures."—[OFFICIAL REPORT, 27th April, 1971; Vol. 816, c. 58.]
To put that in context, Table 16 of the Financial Report shows that the whole of the Inland Revenue reductions in tax in the current year, 1971–72, came to a little more than £256¼ million. The reduction of yield of selective employment tax this year was £290 million. Thus, in the context of the changes in a Budget which made substantial tax reductions, as this one did, to abolish the differential between investment and earned income would obviously be a very expensive matter and, as such, it would have to take its priority among many other claims for reliefs. The basic reason why we believe that it is right to include provision in the Bill for the retention of some measure of differential between investment and earned income is that to abolish it must be considered as one of, and must take its proper order and priority in, a large number of claims that may be made upon my right hon. Friend for the reduction of taxation.
But, of course, I do not stop there, because the other argument, almost exclusively from this side of the Committee, has been the need to give greater encouragement to saving. It cannot be doubted that for many years the level of savings in this country has been unsatisfactory. The savings ratio, the proportion of disposable incomes saved, has been significantly lower in Britain than in most other industrial countries of the world; indeed, it may have been lower than all other industrialised countries.
As my right hon. Friend the Member for Kingston-upon-Thames (Mr. Boyd-

Carpenter) said, all parties and all Chancellors have never missed an opportunity to reiterate the need for savings. We have come to the conclusion that it is necessary to change the basis of taxing savings if we are to get the response we believe we must have from the people Therefore, I say categorically that one of the main objects of the reform we have introduced is to give this greater encouragement to savings incomes.
I find the attitude of hon. and right hon. Members opposite difficult to understand. As I have said, most of them never lose an opportunity—I exclude the hon. Member for Gloucestershire, West (Mr. Loughlin), to whom I shall come shortly—of exhorting our people to save more of their incomes. Yet they seem this afternoon to have sought to justify the imposition of special fiscal penalties on the results of saving. The Labour Party do not know what they want when it comes to savings. They want more savings, but they are not prepared to create the conditions in which savings will be encouraged.
I excluded the hon. Member for Gloucestershire, West because it was manifest from his argument that he did not want any savings at all. The hon. Gentleman shakes his head. Perhaps he does want them. But does he seriously believe that the philosophy he propounded to the Committee ten minutes ago would encourage savings'?

Mr. Loughlin: indicated assent.

Mr. Jenkin: The hon. Gentleman thinks so. The dilemma in which the Labour Party have always found themselves was never more succinctly put than by the former Member for Chislehurst, Mr. Alasdair Macdonald, whom we all liked and admired, when he asked my predecessor, the right hon. Member for Manchester, Cheetham (Mr. Harold Lever), "When does a small saver become a bloated capitalist?". That is a question which no hon. Member opposite has ever been prepared to answer, yet it is the basic dilemma that they face and one which we do not share because we believe that savings should be encouraged, and we are prepared to do something about it.
The hon. Member for Heywood and Royton asked whether there was not a conflict between the language used by


my right hon. Friend when he talked about a modest investment income and the language of the White Paper, in which we talked about a material incentive to savings. I assure him that there is no conflict there, because one can apply a material incentive to saving to a modest amount of investment income and the incentive will be material.
When the Labour Party left office the rate of tax for someone who was nowhere near the surtax level of investment income was 41¼ per cent. By the time this reform becomes effective the first slice of investment income will be taxed at 30 per cent. This represents, perhaps, the biggest incentive to savings which we have seen for many a long year. We do this because we wish to see an increase in the flow of new savings, and by reducing the burden on savings income we shall not only give an incentive to new savings but also create the resources whereby new savings will flow.
I take the point made by my hon. Friend the Member for South Angus (Mr. Bruce-Gardyne) who argued that we need a more responsive capitalist system. He is absolutely right that the penal level of tax on savings income is one of the reasons why managements do not have to respond to sufficient shareholder pressures. I remind him that for the same reason we are reforming corporation tax. It is all part of a coherent, consistent package to make the economy more vital, responsive and dynamic.
Thirdly, a number of my hon. Friends have argued that, on grounds of equity, there are substantial categories of taxpayer with investment income where it is ludicrous that one should impose the additional fiscal penalty of an investment surcharge—people who are retired, as my right hon. Friends the Members for Kingston-upon-Thames and Harrogate said, and people who are on maintenance payments and drawing income under separation agreements, a cause dear to the heart of my hon. Friend the Member for Petersfield (Miss Quennell). Over and over again my correspondence discloses the unfairness that people feel when such incomes are singled out for a specific extra charge as investment income.
My right hon. Friend the Member for Harrogate asked whether we were not

opening the door for a future Government who do not share our attitude to savings and who are anxious to penalise the owners of savings and whether we are not making it easier for such a Government not only to reverse what we are doing but to go very much further. The answer must be, "No". If another Government, should there be one that held such a philosophy, wanted to do that, nothing that we could do in our reform could prevent them from doing it. No question of tying it up legislatively to make it more difficult would be likely to have the slightest effect. The real answer is that the people must not elect a Government who would want to do anything quite so silly. [AN HON. MEMBER: "What about last Thursday?"] Last Thursday the electors knew that they were not dealing with the taxation system.
Therefore, it would be quite wrong for the Committee to accept the Amendment. It would be wrong that the Government should be fettered in any way at this stage in the level of starting point for the surcharge or as to the rate comprised in Amendment No. 18. These are matters which we shall have every opportunity to debate and vote upon when we debate the 1973 Finance Bill after my right hon. Friend, or whoever may succeed him, has announced the relevant figures in that year's Budget. This is not the year in which we can or should lay down any markers at all. The matter must be decided in the light of the fiscal and economic conditions then prevailing.

Mr. Cant: As the Financial Secretary obviously believes that manipulating the tax system is a great magic wand to solve all these problems, will he explain why the brain drain was quiescent from 1968 to 1970 but has assumed alarming proportions once again since the Conservative Government announced a cut of 6d. in the rate of income tax?

Mr. Jenkin: I do not think that the question of the brain drain has very much to do with the Amendment. The Clause is designed to encourage savings. For the reasons that I have stated, I do not think that it would be right to accept the Amendment. I hope that, if the Amendment is put to the vote, the Committee will reject it.

6.15 p.m.

Mr. Marquand: At an earlier stage in the debate the right hon. Member for Kingston-upon-Thames (Mr. Boyd-Carpenter) said that he thought that our probe would be as unsuccessful as the American probe for Mars. There were times during the debate when I thought that the right hon. Gentleman was right and that it had gone way out into stellar space so bizarre were the arguments advanced, particularly by hon. Members opposite.
The Financial Secretary's speech proved beyond doubt that our probe has been 100 per cent. successful—successful beyond our wildest dreams; because, although the hon. Gentleman's speech was both patronising and obscure, he let a sizeable cat out of his bag. He made it clear to my hon. Friend and me that the reason the Government resist the Amendment is, not only on administrative grounds, which we might have been prepared to accept, but also that to a degree at any rate he shares the philosophy which was advanced by his hon. Friends in the debate and he believes that the total disappearance of the differentiation between earned and unearned income could at some stage be a legitimate claimant for action by a future Conservative Government, even if it is not at present. It is that philosophy to which we on this side object.
This has been a revealing and an enjoyable debate. Two main themes have run through it. There has been the argument advanced, by the right hon. Member for Kingston-upon-Thames and by the hon. Member for the Cities of London and Westminster (Mr. Tugendhat) in particular, that investment income is just as precarious as earned income and should therefore be treated in the same way. The extraordinary proposition was advanced by the hon. Member for Cities of London and Westminster that a shareholder might, because of the fall in share values, lose 50 per cent. of his capital and that that justified taxing investment income at the same level as earned income. An employed worker who loses his job loses 100 per cent. of his capital and there is no justification whatever for lumping these two together.

Mr. Boyd-Carpenter: Surely the hon. Gentleman is greatly over-stating the case A man who has the great misfortune to lose his job still retains the fundamental part of his capital—his skill.

Mr. Marquand: We are talking about the taxation of income no matter where it is coming from, either from a man's job or from his capital. A man who loses his job loses 100 per cent. of his job.
We have tabled the Amendment for three main reasons, the first being that put forward by my hon. Friend the Member for Heywood and Royton (Mr. Barnett), namely, that it is inequitable as between one taxpayer and another that earned and unearned income should be taxed at the same level. It is the argument about precariousness. Despite all the parade of hard cases—the sociological camouflage that we always get from hon. Members opposite on such issues—the argument of precariousness remains as intaxt as it was at the beginning.
A separate argument for pressing the Amendment is that of social justice as between different classes in the community Again and again in debates on this and other Finance Bills we have had the parade from hon. Members opposite of small people who are being penalised and hurt by wicked Socialist taxation. We hear that small people are being hurt by the aggregation of children's income. No doubt on Thursday we shall hear about similar small people being hurt by the capital gains charge on death. Behind these small people that so exercise the minds of hon. Members opposite in debate there lurk the big people whom hon. Members opposite are really concerned to protect. Who are the people who will benefit from having a high threshold of investment income under the Clause? The Financial Secretary and other speakers from the Government benches talk as though, if a certain level of investment income is fixed, a certain threshold below which the surcharge will not be levied, the only people who will benefit are those whose investment income is below that threshold. This is not true. Whatever the threshold, the advantage will go right up the scale, because the person's total chargeable income will be that much less.

Mr. Patrick Jenkin: Will the hon. Gentleman answer the question: when does the small saver become the bloated capitalist?

Mr. Marquand: Not when he invests in Rolls-Royce, I think is part of the answer.
The great bulk of investment income does not go to the small saver, as all the figures show perfectly well. In 1965–66 those people whose investment income was over £10,000 a year received 21 per cent. of the total amount of investment income, and they comprised just under 1 per cent. of the total number who received investment income. These are the people whom the Conservative party opposite are concerned to protect.

Mr. Edward du Cann: Is the hon. Gentleman aware that the number of small investors continues to grow annually? There are now over two million people investing in unit trusts alone, for example. It is only the kind of discouragement that we hear so consistently and in artificial terms from Labour hon. Members which makes it so difficult to raise new productive capital for British industry, which needs it so badly.

Mr. Marquand: It is true that there has been a gratifying rise in the unit trust movement. No one on this side of the Committee is opposed to that, but what we are talking about is whether investment income should be charged at the same rates as earned income. What we are saying is that for the small saver or the big saver there should in equity be discrimination in favour of earned income, because this represents effort now being undertaken, and unearned income does not.
Second, the great bulk of unearned income goes to the same small class of property-owners that the whole Bill is designed to protect and advantage.

Mr. Peter Rost: Does not the hon. Gentleman accept that the bulk of investment income is not spent but reinvested, and is therefore accumulated to create fresh capital, which we so sorely need? Therefore, the fact that some of it may be distributed in large amounts does not affect the issue.

Mr. Marquand: This may well be, but I cannot see that it alters the argument

on grounds of equity or principle in the slightest degree. The investor may reinvest his investment income. Fine—and then what happens? He is better off than before, so he benefits from the reinvestment.

Mr. Cooper: rose—

Mr. Marquand: I want to deal with one intervention at a time.
Hon. Members opposite seem to think that we are out to clobber the saver or the investor, but that is not the case. What we are asking is for them to justify a change in the fiscal system which has operated since 1907 by which there has been discrimination in favour of earned income. That is the point we are debating. It is no question of introducing a new form of discrimination against investment. The proposition being advanced by Conservative hon. Members is that we should now introduce a new discrimination against earned income—[Interruption.]—or in favour of unearned income. If Conservative hon. Members want to change the system in the way that has been advocated, not from the Government Front Bench but by many hon. Members opposite who have spoken today, they want to discriminate in favour of the unearned and against the earned, as compared with the previous situation. They cannot have it both ways, which is what they are trying to do.
Despite what the Financial Secretary said and the cautious tone which he adopted to his hon. Friends, we are worried that if a large threshold is introduced, below which earned and unearned income are charged at the same rate, then a major wedge is introduced into the whole principle of progressive taxation. Suppose it is said that the first slice of investment income should be £1,000 a year on the ground of protecting and helping the small saver, and that it is important and necessary on grounds of economic efficiency to build up savings, we can see easily what will happen in future years. Next year or the year after, or the year after that, we shall receive a party of small savers from the City who will say that £1,000 is not enough. They will say, "We should have £1,500, £2,000 or £5,000. In fact, let's scrap the differentiation altogether. It is no longer justified."
We on these benches wish to pin the Bill down to a precise, low figure so that we can be sure that there will be no whittling away of the principle in time to come. That is why we have tabled the Amendment and why we believe that the probe has hit the target, as the inter-

ventions from hon. Members opposite have shown. That is why I ask my hon. Friends to support the Amendment in the Lobby.

Question put, That the Amendment be made:—

The Committee divided: Ayes 181, Noes 228.

Division No. 368.]
AYES
[6.28 p.m.


Albu, Austen
Grant, John D. (Islington, E.)
Murray, Ronald King


Allaun, Frank (Salford, E.)
Griffiths, Eddie (Brightside)
Ogden, Eric


Allen, Scholefield
Griffiths, Will (Exchange)
O'Halloran, Michael


Archer, Peter (Rowley Regis)
Hamilton, James (Bothwell)
O'Malley, Brian


Ashton, Joe
Hamilton, William (Fife, W.)
Oram, Bert


Atkinson, Norman
Hannan, William (G'gow, Maryhill)
Orme, Stanley


Bagier, Gordon A. T.
Harper, Joseph
Oswald, Thomas


Barnett, Joel
Harrison, Walter (Wakefield)
Paget, R. T.


Benn, Rt. Hn. Anthony Wedgwood
Hart, Rt. Hn. Judith
Palmer, Arthur


Bennett, James (Glasgow, Bridgeton)
Heffer, Eric S.
Pannell, Rt. Hn. Charles


Bidwell, Sydney
Horam, John
Parry, Robert (Liverpool, Exchange)


Bishop, E. S.
Houghton, Rt. Hn. Douglas
Pavitt, Laurie


Blenkinsop, Arthur
Huckfield, Leslie
Pendry, Tom


Boardman, H. (Leigh)
Hughes, Rt. Hn. Cledwyn (Anglesey)
Pentland, Norman


Booth, Albert
Hughes, Mark (Durham)
Perry, Ernest G.


Bottomley, Rt. Hn. Arthur
Hughes, Robert (Aberdeen, N.)
Prentice, Rt. Hn. Reg



Hughes, Roy (Newport)
Prescott, John


Boyden, James (Bishop Auckland)
Hunter, Adam
Price, J. T. (Westhoughton)


Brown, Hugh D. (G'gow, Provan)
Jenkins, Hugh (Putney)
Price, William (Rugby)


Brown, Ronald (Shoreditch &amp; F'bury)
Jenkins, Rt. Hn. Roy (Stechford)
Rankin, John


Buchan, Norman
John, Brynmor
Reed, D. (Sedgefield)


Buchanan, Richard (G'gow, Sp'burn)
Johnson, Carol (Lewisham, S.)
Rees, Merlyn (Leeds, S.)


Callaghan, Rt. Hn. James
Johnson, James (K'ston-on-Hull, W.)
Rhodes, Geoffrey


Cant, R. B.
Jones, Barry (Flint, E.)
Roberts, Albert (Normanton)


Carter-Jones, Lewis (Eccles)
Jones, Dan (Burnley)
Robertson, John (Paisley)


Castle, Rt. Hn. Barbara
Jones, Gwynoro (Carmarthen)
Roderick, Caerwyn E. (Br'c'n &amp; R'dnor)


Clark, David (Colne Valley)
Jones, T. Alec (Rhondda, W.)
Rose, Paul B.


Cocks, Michael (Bristol, S.)
Judd, Frank
Ross, Rt. Hn. William (Kilmarnock)


Corbet, Mrs. Freda
Kaufman, Gerald
Sheldon, Robert (Ashton-under-Lyne)


Cox, Thomas (Wandsworth, C.)
Kelley, Richard
Short, Rt. Hn. Edward (N'c'tle-u-Tyne)


Crawshaw, Richard
Kinnock, Neil
Silkin, Rt. Hn. John (Deptford)


Crosland, Rt. Hn. Anthony
Lambie, David
Silkin, Hn. S. C. (Dulwich)


Cunningham, G. (Islington, S.W.)
Lamond, James
Sillars, James


Dalyell, Tam
Lawson, George
Silverman, Julius


Davidson, Arthur
Lee, Rt. Hn. Frederick
Skinner, Dennis


Davies, Denzil (Llanelly)
Leonard, Dick
Small, William


Davies, G. Elfed (Rhondda, E.)
Lestor, Miss Joan
Spearing, Nigel


Davies, Ifor (Gower)
Lewis, Arthur (W. Ham N.)
Spriggs, Leslie


Davies, S. O. (Merthyr Tydvil)
Lewis, Ron (Carlisle)
Stoddart, David (Swindon)


Davis, Clinton (Hackney, C.)
Lomas, Kenneth
Strang, Gavin


Dell, Rt. Hn. Edmund
Loughlin, Charles
Swain, Thomas


Dempsey, James
Lyon, Alexander W. (York)
Taverne, Dick


Doig, Peter
Lyons, Edward (Bradford, E.)
Thomas, Rt. Hn. George (Cardiff, W.)


Douglas, Dick (Stirlingshire, E.)
Mabon, Dr. J. Dickson
Thomas, Jeffrey (Abertillery)


Duffy, A. E. P.
McBride, Neil
Urwin, T. W.


Dunn, James A.
McElhone, Frank
Varley, Eric G.


Dunnett, Jack
Mackenzie, Gregor
Walker, Harold (Doncaster)


Eadie, Alex
Mackie, John
Wallace, George


Edwards, Robert (Bilston)
Mackintosh, John P.
Watkins, David


Edwards, William (Merioneth)
Maclennan, Robert
Weitzman, David


Ellis, Tom
MacPherson, Malcolm
White, James (Glasgow, Pollok)


English, Michael
Mahon, Simon (Bootle)
Whitehead, Phillip


Fernyhough, Rt. Hn. E.
Mallalieu, E. L. (Brigg)
Whitlock, William


Fitch, Alan (Wigan)
Marks, Kenneth
Willey, Rt. Hn. Frederick


Foley, Maurice
Marquand, David
Wilson, Alexander (Hamilton)


Forrester, John
Marsden, F.
Wilson, Rt. Hn. Harold (Huyton)


Galpern, Sir Myer
Mason, Rt. Hn. Roy
Wilson, William (Coventry, S.)


Garrett, W. E.
Meacher, Michael
Woof, Robert


Gilbert, Dr. John
Millan, Bruce



Ginsburg, David
Molloy, William
TELLERS FOR THE AYES:


Golding, John
Morris, Charles R. (Openshaw)
Mr. Donald Coleman and


Grant, George (Morpeth)
Mulley, Rt. Hn. Frederick
Mr. William Hamling.




NOES


Alison, Michael (Barkston Ash)
Atkins, Humphrey
Baker, W. H. K. (Banff)


Amery, Rt. Hn. Julian
Awdry, Daniel
Balniel, Lord


Astor, John
Baker, Kenneth (St. Marylebone)
Barber, Rt. Hn. Anthony




Batsford, Brian
Hastings, Stephen
Onslow, Cranley


Beamish, Col. Sir Tufton
Havers, Michael
Oppenheim, Mrs. Sally


Bennett, Sir Frederic (Torquay)
Hawkins, Paul
Osborn, John


Benyon, W.
Hay, John
Owen, Idris (Stockport, N.)


Berry, Hn. Anthony
Hayhoe, Barney
Page, John (Harrow, W.)


Biffen, John
Heseltine, Michael
Pardoe, John


Blaker, Peter
Hicks, Robert
Parkinson, Cecil (Enfield, W.)


Boardman, Tom (Leicester, S.W.)
Higgins, Terence L.
Peel, John


Boscawen, Robert
Hiley, Joseph
Percival, Ian


Bossom, Sir Clive
Hill, John E. B. (Norfolk, S.)
Pounder, Rafton


Boyd-Carpenter, Rt. Hn. John
Hill, James (Southampton, Test)
Price, David (Eastleigh)


Bray, Ronald
Holland, Philip
Pym, Rt. Hn. Francis


Brown, Sir Edward (Bath)
Holt, Miss Mary
Quennell, Miss J. M.


Bruce-Gardyne, J.
Hooson, Emlyn
Raison, Timothy


Bryan, Paul
Hordern, Peter
Ramsden, Rt. Hn. James


Buck, Antony
Hornsby-Smith, Rt. Hn. Dame Patricia
Redmond, Robert


Bullus, Sir Eric
Howe, Hn. Sir Geoffrey (Reigate)
Reed, Laurance (Bolton, E.)


Burden, F. A.
Howell, David (Guildford)
Rees, Peter (Dover)


Butler, Adam (Bosworth)
Howell, Ralph (Norfolk, N.)
Renton, Rt. Hn. Sir David


Campbell, Rt. Hn. G. (Moray &amp; Nairn)
Irvine, Bryant Godman (Rye)
Rhys Williams, Sir Brandon


Carlisle, Mark
James, David
Ridley, Hn. Nicholas


Carr, Rt. Hn. Robert
Jenkin, Patrick (Woodford)
Ridsdale, Julian


Cary, Sir Robert
Jennings, J. C. (Burton)
Roberts, Michael (Cardiff, N.)


Chapman, Sydney
Jessel, Toby
Roberts, Wyn (Conway)


Chataway, Rt. Hn. Christopher
Johnson Smith, G. (E. Grinstead)
Rost, Peter


Churchill, W. S.
Johnston, Russell (Inverness)
Russell, Sir Ronald


Clark, William (Surrey, E.)
Kellett, Mrs. Elaine
Sandys, Rt. Hn. D.


Clarke, Kenneth (Rushcliffe)
Kershaw, Anthony
Scott-Hopkins, James


Clegg, Walter
Kilfedder, James
Sharples, Richard


Cockeram, Eric
King, Evelyn (Dorset, S.)
Shaw, Michael (Sc'b'gh &amp; Whitby)


Cooke, Robert
King, Tom (Bridgwater)
Shelton, William (Clapham)


Cooper, A. E.
Kinsey, J. R.
Simeons, Charles


Corfield, Rt. Hn. Frederick
Kitson, Timothy
Skeet, T. H. H.


Costain, A. P.
Knight, Mrs. Jill
Smith, Dudley (W'wick &amp; L'mington)


Critchley, Julian
Knox, David
Soref, Harold


Crouch, David
Lambton, Antony
Speed, Keith


Curran, Charles
Legge-Bourke, Sir Harry
Spence, John


d'Avigdor-Goldsmid, Sir Henry
Le Marchant, Spencer
Sproat, Iain


d'Avigdor-Goldsmid, Maj.-Gen. James
Lloyd, Ian (P'tsm'th, Langstone)
Stainton, Keith


Dean, Paul
Longden, Gilbert
Stanbrook, Ivor


Deedes, Rt. Hn. W. F.
Loveridge, John
Steel, David


Dixon, Piers
Luce, R. N.
Stewart-Smith, D. G. (Belper)


Dodds-Parker, Douglas
MacArthur, Ian
Stodart, Anthony (Edinburgh, W.)


Dykes, Hugh
McLaren, Martin
Stoddart-Scott, Col. Sir M.


Eden, Sir John
Maclean, Sir Fitzroy
Stokes, John


Elliott, R. W. (N'c'tle-upon-Tyne, N.)
McMaster, Stanley
Sutcliffe, John


Emery, Peter
Macmillan, Maurice (Farnham)
Tapsell, Peter


Eyre, Reginald
McNair-Wilson, Michael
Taylor, Sir Charles (Eastbourne)


Fell, Anthony
McNair-Wilson, Patrick (NewForest)
Taylor, Frank (Moss Side)


Fidler, Michael
Mather, Carol
Taylor, Robert (Croydon, N.W.)


Finsberg, Geoffrey (Hampstead)
Maude, Angus
Tebbit, Norman


Fisher, Nigel (Surbiton)
Maudling, Rt. Hn. Reginald
Temple, John M.


Fookes, Miss Janet
Mawby, Ray
Thatcher, Rt. Hn. Mrs. Margaret


Fortescue, Tim
Maxwell-Hyslop, R. J.
Thomas, John Stradling (Monmouth)


Foster, Sir John
Meyer, Sir Anthony
Tilney, John


Fowler, Norman
Mills, Peter (Torrington)
Trafford, Dr. Anthony


Fraser, Rt. Hn. Hugh (St'fford &amp; Stone)
Mills, Stratton (Belfast, N.)
Trew, Peter


Gardner, Edward
Mitchell, Lt.-ColC. (Aberdeenshire, W)
Tugendhat, Christopher


Gilmour, Ian (Norfolk, C.)
Mitchell, David (Basingstoke)
Turton, Rt. Hn. R. H.


Gilmour, Sir John (Fife, E.)
Moate, Roger
Vickers, Dame Joan


Goodhew, Victor
Molyneaux, James
Waddington, David


Gower, Raymond
Money, Ernie
Walker-Smith, Rt. Hn. Sir Derek


Grant, Anthony (Harrow, C.)
Monks, Mrs. Connie
Walters, Dennis


Green, Alan
Monro, Hector
White, Roger (Gravesend)


Grieve, Percy
Montgomery, Fergus
Wiggin, Jerry


Griffiths, Eldon (Bury St. Edmunds)
Morgan, Geraint (Denbigh)
Wilkinson, John


Grimond, Rt. Hn. J.
Morgan-Giles, Rear-Adm.
Wolrige-Gordon, Patrick


Gurden, Harold
Mudd, David
Woodhouse, Hn. Christopher


Hall, Miss Joan (Keighley)
Murton, Oscar
Worsley, Marcus


Hall-Davis, A. G. F.
Nabarro, Sir Gerald
Younger, Hn. George


Hannam, John (Exeter)
Neave, Airey



Harrison, Brian (Maldon)
Nicholls, Rt. Hn. Harmar
TELLERS FOR THE NOES:


Harrison, Col. Sir Harwood (Eye)
Noble, Rt. Hn. Michael
Mr. Bernard Weatherill and


Haselhurst, Alan
Normanton, Tom
Mr. Hugh Rossi.



Nott, John

Mr. du Cann: I beg to move Amendment No. 17, in page 26, line 31, after 'income', insert 'and Schedule A income'.
This is, in essence, a simple matter, but it is of some significance, the Committee

may think, to those interested in the land, its wellbeing, prosperity and productivity. It concerns the treatment of rental income for tax purposes—and I should probably be justified in saying the "exceptional" treatment of rental income


for tax purposes. I want to put to the Committee three propositions which I hope will find general acceptance.
First, there is a need for this country substantially to increase its food production. The N.E.D.O. target will be well within the recollection of the Committee. The Economic Development Committee for Agriculture, in its publication, "Agriculture's Import Saving Rôle", prognosticated an import saving target of some £220 million a year by 1972–73, involving an expansion of agricultural output of some 22 per cent. That target in general is accepted by government and by this Parliament as a whole. Certainly from the point of view of our balance of payments it is common sense.
My second proposition is that there is in every one of our industries a great need for increased capital formation. I recall how so much of our Budget discussion has been about investment. We cannot open a newspaper without reading an article by a learned economist, we cannot make a speech without referring to the need for increased investment. We shall best succeed as a nation in terms of manufacture, production, productivity, and prosperity if we bring the maximum capital to the workers' elbow and we outdo our competitors in this area beyond any other.
We cannot have food without the capital to produce it and help bring it into production. The Economic Development Committee to which I referred estimated that to achieve the target of which I spoke an increased capital investment in agriculture of £230 million within the next five years would be necessary. We can add to that figure as I said in the debate on the Budget Statement, money needing to be spent, spent on such additional items as drainage etc. The need for new capital investment in agriculture, as in every other industry, is enormous.
My third proposition is this. It will certainly be within the knowledge of individual Members that there is a shortage of farms to rent. In discussions with the N.F.U. or the C.L.A. or my constituents I am continually reminded of this. The consequence is that fewer young people come in to farming today than there ought to be coming in for the health of the industry.
Nor is it right that virtually the only method of farming open to young people today is that of owner-occupation. There are great difficulties in raising the capital to get started as an owner-occupier. It surprises me that we spend such a lot of time here talking about the need to help people accumulate deposits by which they can buy their own houses and we also talk about increasing the number of houses to rent, yet we talk so little about the need to do our utmost to see that there are more farms available for renting.
If the Committee accepts those propositions, that we could and should expand agricultural production, that there is a growing need for capital investment in agriculture and that it is necessary to do something to increase the number of farms available for renting, the question is: How?
We spend much time talking about some aspects of this problem. Under successive governments, this Parliament, with the agreement of virtually all of us, has recognised at least some of these needs. We have approved grants to bring marginal land into production in the hills; we have agreed on methods by which the best technical advice may be given to those who wish to increase productivity; we have agreed to grants for new buildings, for amalgamations of holdings and so on. So far so good. The purpose of this Amendment, in a minor way is to suggest an additional method by which we can help solve these problems.

Sir Gerald Nabarro: My right hon. Friend and I were engaged ten years ago in a lengthy exercise spread over three years and three consecutive Finance Bills endeavouring to secure the total abolition of income tax Schedule A. We succeeded in securing abolition of part of it, the major part, which related to income tax Schedule A on owner-occupied domestic hereditaments. Would he define the area with which he is now dealing, namely, what residual of income tax Schedule A is now payable?

Mr. du Cann: I am much obliged, as always, to my hon. Friend, for he leads me naturally to my next point, which is precisely an answer to his question. I remember so well the campaign to which


he referred, and I will come to that in a moment. Currently, rental income is treated for tax purposes in just the same way as income from portfolio investment. Clause 22 provides for the continuation of this process. I do not believe that this can be right because they are entirely different things and should be treated differently.
6.45 p.m.
Treating them as the same is a maximum discouragement to anyone to let a farm. It is the maximum discouragement, for example, to the elderly owner-occupier to let his farm to a young man who wants to come into the business. I began by saying that this was an exceptional way of treating rental income. So it is. If I want to establish a caravan site it would be treated differently for tax. Why agriculture should be penalised in this way I do not understand.
It is important to encourage the letting of farms. It is equally important to encourage their equipment. As any farmer well knows, particularly with the rise in wages in certain manufacturing industries, notably the tractor industry, equipment gets no cheaper. Investment is needed whether a farm is owner-occupied or let.
Some while ago Lord Reid in the well-known House of Lords case which is usually referred to, I think, as the "Epping Forest Case", the Commissioners of Inland Revenue v. the Corporation of London acting in its capacity as Conservators of Epping Forest, used the phrase "pure income profit". By that phrase he described income which carried with it, and this is a point which will arouse much sympathy on the other side of the Committee, a total lack of obligation.
I do not use that phrase in any pejorative sense. Quite the reverse. I believe in portfolio investment and I have devoted my commercial life to endeavouring to encourage an increasing number of our citizens to engage in this exercise. I see nothing wrong with thrift and I am anxious to encourage it. I have always believed in the division of power through ownership of the joint stock company rather than its concentration in the hands of a few individuals through, for example, nationalisation.
However, I believe that income which carries a total lack of obligation should be differentiated from income which carries some obligation—

Sir G. Nabarro: Would my right hon. Friend give way?

Mr. du Cann: In a moment. Rental income is, in one case at any rate, differentiated from pure income profit by Schedule 4 of the Finance Act 1963 which I will describe more particularly when my hon. Friend has had his say.

Sir G. Nabarro: My right hon. Friend is exciting me intensely—in fact he is titillating me in this matter of investment portfolio. Would he deal with this narrow, specialised but highly important point? I may charge the cost of maintaining a property against the net income for the property in respect of the computation of liability to income tax and surtax. What I may not charge is the cost of managing a portfolio, including for example the unit trusts of my right hon. Friend's admirable unit trust undertaking, against the net income derived from the unit trust. Why is property in the form of real estate or farms thus favoured as compared with the investment of the equivalent, in a strictly financial sense, in unit trusts? Will my right hon. Friend apply his mind to this critically important point?

Mr. du Cann: I will endeavour to do exactly that, but I must first deny with some modesty the charge of excitement which my hon. Friend lays at my door. That done, I am willing to agree with my hon. Friend, particularly about Schedule 4 of the Finance Act, 1963, to which I was referring. This precisely bears out in one way the contention of my hon. Friend. Under this Act certain expenses are allowed, for example, repairs, costs of management and so on, against gross receipts—exactly those items which my hon. Friend pointed out would not be allowed in the case he described. This leads me to my point that the difference in nature is admitted by the Tax Acts. That being so, it would be logical that the difference should be continued, and indeed extended, in good sense and in good order.
My hon. Friend referred to the campaign which he led in the old days—and my right hon. Friend the Member for Kingston-upon-Thames (Mr. Boyd-


Carpenter) will remember it well—against Schedule A. It eventually led to the then right hon. and learned Member for Wirral (Mr. Selwyn Lloyd) putting through the legislation which finally abolished it in 1963. If I may quote shortly from HANSARD, my right hon. and learned Friend the Member for Wirral said:
I also said that the code of taxation of rents and other incomes from real property would also have to be reviewed".—[OFFICIAL REPORT, 3rd July, 1962; Vol. 662, c. 326.]
In other words, this was a process which he anticipated would be taking place nine years ago. That being so, it is to be hoped that the review could now be progressed a little bit.
The Bill provides that the residue—that is to say, the net income after the allowances to which I have referred—will be taxed at what are in effect the highest rates in our tax system. This is unfair, and it is not in logic right to tax the residue of rental income as if no effort has been required. I hope the Committee will agree with me in thinking that net rents should not be grouped with investment income under the Bill. To do so is to run counter to the ordinary direction of our agricultural programme. It is as a supporter of that programme, and as one who believese in the most efficient and productive use of our land which, next to our people, is the best asset that we have, that I move the Amendment.

[Sir R. GRANT-FERRIS in the Chair]

Sir G. Nabarro: I am much impressed and also excited by what my right hon. Friend the Member for Taunton (Mr. du Cann) has said in moving the Amendment. It is, of course, an exciting topic. We had endless disputation in Committee on the Finance Bills of 1960, 1961, 1962 and 1963 on whether it was fair to abolish income tax Schedule A over the whole field or only over the major sector, which was income tax Schedule A on owner-occupied domestic hereditaments. It is worth recalling why it was abolished.
There were 6,600,000 owner-occupiers of houses at that time, of whom only approximately 10 per cent. were making maintenance claims on the Revenue. As a result of the activities of my hon. Friends and myself in the House of Commons, the number of maintenance

claims rose enormously over two or three years. This resulted in a proliferation of relatively tiny claims and a huge amount of paper work for the Revenue. It became evident that the collection of £34 million in a full year from income tax Schedule A for domestic hereditaments, owner-occupied, was not a worthwhile or rewarding occupation. It was for that reason that the major part of the income tax Schedule A was abolished.
My right hon. Friend the Chancellor of the Exchequer was in those years either Financial Secretary and later Economic Secretary, or the other way round. He occupied both those offices and advised the Chancellor of the Exchequer. It was our impression then that the Chancellor of the Exchequer would deal at a later stage with the small residual of income tax Schedule A, but he wrapped it up in the course of these debates in 1963 in a rather inexact form of undertaking to review the position, since when nothing whatever has happened. Of course, a Labour Government came in in 1964 which was not bound by that undertaking.
It would be interesting if the Financial Secretary could tell us today how much net revenue is collected from the balance of income tax Schedule A, and how much of the net sum collected finds its way into a charge against other forms of direct or indirect taxation. It is my impression that the amount of income tax Schedule A now left as a residual is small enough to form the subject of abolition, hopefully this year but, if not this year, next year.
My final point is the disequilibrium that exists between differing forms of investment. I tried to make the point shortly in an intervention which my right hon. Friend kindly allowed me to make at a relevant point in his speech, but it should be repeated. Disequilibrium exists, for example, because investments in unit trusts do not allow of any charge being made against net income in respect of the management of the portfolio, notably in the instance of minors. Management of the portfolio is often essential because it is almost impossible—and I feel sure I carry the whole Committee with me here—for the layman, notably a minor, to assess the liability of unit trust units to capital gains duty.
So ridiculously is the capital gains duty levied on unit trust holdings that it is


often expressed to six places of decimals of one old penny, and very often a person may own only 100 or 200 units. My right hon. Friend the Member for Taunton has specialised in unit trusts since he is chairman of a large group of such trusts. He must know all about the many hours spent in trying to assess capital gains duty to six places of decimals of one old penny on relatively small investments. In appropriate cases professional people have to be employed, incurring charges for the management of portfolios of Stock Exchange shares including unit trusts. I would never pretend to do my own arithmetic in this respect. The work is done for me by a chartered accountant on the sole ground that I am afraid of making a mistake.

Mr. Barnett: Oh.

7.0 p.m.

Sir G. Nabarro: The hon. Member for Heywood and Royton (Mr. Barnett) who is grinning at me is himself a chartered accountant. I am one of the clients of his profession. His profession profits mightily from the fees I have to pay to avoid making a mistake in working out six places of decimals of one old penny. I will willingly give way to my right hon. Friend the Member for Taunton so that he may bear out what I am saying.

Mr. du Cann: indicated assent.

Sir G. Nabarro: My right hon. Friend agrees with me. No charge against income is permitted in regard to professional advice in that regard, but in the matter of Income Tax Schedule "A", or anything connected with the income from real estate, a charge may be made at once for all professional charges against the net income derived.

Mr. Ramsden: If a person does the work for himself and is not professionally advised, he receives no allowance.

Sir G. Nabarro: It all depends. There are ways and means of employing one's wife. [Laughter.] I am sorry that there is such hilarity in the Committee. I repeat that there are ways and means of employing one's wife. For example, a doctor employs his wife to answer the telephone, pays her £200 a year for her services and sets that off as a charge against net income for the purpose of computing income tax and surtax.

[Interruption.] I do not do this. I answer the telephone myself.

Mr. David James: Is the hon. Gentleman seriously suggesting that any landowner can employ his wife five days a week to drive a bulldozer, which is the sort of thing many people with land of their own or agricultural estates would have to do if they had nobody else.

Sir G. Nabarro: My hon. Friend's name is also on the Amendment and he can, if he wishes, expand on the valuable point about driving bulldozers. Whether a farmer's wife is employed to drive a bulldozer depends on her physical capacity and ingenuity.
What I am trying to get at is the disequilibrium which exists in the matter of treatment of charges for management and other services. In respect of real estate they are allowed against net income, but in respect of an investment in unit trusts and stocks and shares they are not so allowed. My hon. Friend the Chief Secretary to the Treasury used to be connected with the Wider Share Ownership Council and he knows the veracity of the statements I am making, although they are causing some hilarity. If one treats a true proposition with a little mirth and humour, one can often make a point much more attractively.
I hope my right hon. Friend the Chancellor of the Exchequer will carry out the review of this matter which he promised to undertake as long ago as 1963. It is not irrelevant to suggest that the Financial Secretary might see fit to abolish the residual income tax on Schedule A in the 1972 Finance Bill.

Mr. Ramsden: I wish to say a brief word in support of my right hon. Friend the Member for Taunton (Mr. du Cann). I should declare a modest interest in that although I do not own any land I farm some land and manage other land as trustee for other people.
My right hon. Friend made a worthwhile and valuable case. I was reminded of an agricultural maxim which was current in Yorkshire that land is like wind—it is bad to hold and good to let. My right hon. Friend convincingly told the Committee that that state of affairs no longer prevails today. The fact is that the present tax treatment of income from


land is such that people will tend to hang on to land and farm it themselves rather than let it.
This state of affairs is brought about because of two reasons, one of which was touched on by my right hon. Friend. The first reason is that profits from land in hand are treated as earned income from the point of view of taxation, whereas profits from land which is let are treated as unearned income.
The second reason is that the interest on capital borrowed to effect repairs or improvements to land which one has in hand oneself is allowable against taxation, whereas the interest on the capital required to effect similar repairs to property which is let is not so allowable. This is a glaring anomaly and I was hoping that my right hon. Friend would have put the situation right. I hope that at least he will do so in the future.
This does not result in a particularly healthy state of affairs in agriculture in respect of new entrants. If my hon. Friend in his reply cannot meet the case put forward on this Amendment, I hope that at least he will acknowledge the need to move in this direction and to look at other means, if such there be, to achieve my right hon. Friend's objective.

Mr. John E. B. Hill: I too wish to support the Amendment of my right hon. Friend the Member for Taunton (Mr. du Cann). If British agriculture is to prosper the quite separate duties of ownership and occupation must both be discharged. Enshrined in the agricultural legislation is a list of the long statutory duties that fall upon the owner. I have only to mention such matters as drainage, provision and maintenance of fixed equipment, buildings, roads and all the aspects of ownership, as distinct from husbandry, to make it apparent that land-owning should be a business, because in fulfilling the duties of ownership a great deal of work upon the land needs to be carried out and contacts made with tenants and with the various crafts and trades on the land.
It is true that these can be to some extent farmed out to professional advisers. But even in that case any but the most absentee and disinterested owner will spend a lot of time discussing his land and what should be done with it with

such advisers. This is quite different in its nature from merely holding portfolio investments.
The present situation is somewhat anomalous. Apart from the disincentive to let agricultural land to which my right hon. Friend the Member for Harrogate (Mr. Ramsden) referred, it is possible for owners to receive what are agricultural rents and to have them counted as earned income. If, for example, one has a lot of land in hand and a relatively small area is let, the rent is often counted as a casual farm receipt. If the same area of land is owned by someone who has no other land in hand, it is counted as unearned income.
There is a growing tendency to enter into various partnership arrangements which take over the former relationship of landlord and tenant as a result of which what might have been a rent under the old system may emerge as partnership income and be counted as earned income. That may be acceptable in a family or among relatives or other people in close contact, but it works against the general system in which one would like the owners of land to be more willing to let it.
We have heard a good deal about the need for more capital in British agriculture, especially if we are to fulfil the potential which is necessary in order for us to play our part should we enter the European Community—or, for that matter, if we should remain outside it. This touches on the whole balance of payments argument. At the moment, the Wilson Committee is investigating the need for further capital in British agriculture. In addition, last year there was an O.E.C.D. report on capital in agriculture in all the European countries. The need is a general one. One of the facts emerging from that report applies to Britain and most other countries in Europe. It is that the return on agricultural investment on the ownership side is very much less than in any other comparable investment, for example, in portfolio securities.
Provided that one wants to encourage capital into agriculture, this would seem to be a good reason for considering making rental income from agricultural land equivalent to earned income. It may be that the same arguments apply to


urban rented property. I do not pretend to know about that. If we want to encourage the provision of urban property for rent, this would seem to be wholly good and, if I remember rightly, in consonance with the recommendations of the Milner Holland Report of some years ago.
There is a case for considering this proposal, especially at a time when the Government are reviewing the nature of personal taxation and the categories of income. I hope that my right hon. Friend the Chancellor of the Exchequer will consider it very carefully.

Mr. John Mackie: I rise only to put forward one point which has not been made so far. I was sorry not to be here to listen to the speech of the right hon. Member for Taunton (Mr. du Cann), but I have considerable sympathy with the points which have been made by the right hon. Member for Harrogate (Mr. Ramsden) and the hon. Member for Norfolk, South (Mr. John E. B. Hill), provided always that the landlord acts as a landlord and does the jobs which the hon. Gentleman mentioned, such as maintaining drainage, buildings, roads, and so on.
Today, we see far too many farms being let on full repairing leases, and tenants have to do any improvements themselves, which subsequently may be taken over. In such a case, the landlord is not running the farm as a business and does not deserve to have his rent treated as earned income. I think that it is important to make that point.

Mr. Jerry Wiggin: In this day and age, a great many farms are let by tender, and those circumstances are taken into account by the would-be tenants.

Mr. Mackie: I do not agree with that at all.

7.15 p.m.

[Captain WALTER ELLIOT in the Chair]

Mr. David James: I do not dissent from the point made by the hon. Member for Enfield, East (Mr. Mackie), because it rather underlines one that I wish to make. Being an agricultural landowner can involve a man in a lot of work. If he pays a professional bailiff to do it for him, the salary is a legitimate charge.

On the other hand, if he does it himself in order to save money, he cannot claim any earned income relief.
I was being quite serious when I intervened in the speech of my hon. Friend the Member for Worcestershire, South (Sir G. Nabarro) to ask whether his wife could drive a heavy bulldozer. I know a man who had to give up an honourable career in one of the Services to take over a landed estate. He cannot afford to employ a great deal of labour. As a result, he works a full week doing the heavy jobs that no one else can do for him. In such a case, a farmer should be allowed to charge his own labour for earned income purposes. The friend whom I have in mind forfeited his Service salary by coming out to run the family property. At present, he works full-time for nothing.
The present system is gradually sucking money from the land. My main concern is that successive Governments do not know which way they are pulling. Ministers of Agriculture assure us that larger and larger agricultural units will be necessary in this modern age, especially if we go into the Common Market. On the other hand, our taxation system, whether it be estate duty or the ordinary rates of taxation, is such that it is bound to fragment land. I hope that we shall have some indication at the end of this debate about whether the Government favour the maintenance of large units or their fragmentation. Will those people who have reasonably sized units already be able by their sweat and labour, which should get ordinary earned income tax relief, to build them up into even larger units?

Mr. Peter Mills: I want to support my right hon. Friend the Member for Taunton (Mr. du Cann). There is a very real problem for many landlords, and great efforts have been made by them to bring their farms and estates up to scratch in recent years. Very real efforts have been made by them to modernise their properties. All the nonsense about absent landlords is no longer true. Many of the criticisms made about them in the past are fast disappearing. They really strive to modernise their farms and to turn them into viable units for their tenants. The present situation works against many landlords.
I agree that it is vitally important to have more capital in agriculture. Again the present situation works against it. If we are to have really efficient and modern agriculture, as we shall have to in or out of the European Community, it means a great deal of new capital coming into the industry. The present situation tends to discourage this, and I hope that the Government will look carefully at the points which have been made in this short debate.
I accept what the hon. Member for Enfield, East (Mr. Mackie) said about the importance of ensuring that those concerned are real landlords. This is a valid point. Much has to be done by these gentlemen these days, and they do it. I hope that the Minister will look carefully at this problem. I have pleasure in supporting the Amendment.

Mr. Patrick Jenkin: My hon. Friend the Member for Torrington (Mr. Peter Mills) said that this was a very real problem for many landlords. I assure him that, speaking as a London Member, this is a very real problem for a Financial Secretary. I am not quite like the small boy who when asked what he wanted to be said that he did not know what it was called, but it was having a large house and lots of horses. I assure my right hon. and hon. Friends that I fully take on board the case which they have made so attractively, persuasively and moderately.
There will always be difficulty in a tax system or, indeed, any other system of administration which seeks to draw a line between one activity and another, one kind of property and another or one kind of commodity and another. There will always seem to be cases which fall fairly near the line but do not qualify for going across it.
The nub of the case put forward by my right hon. and hon. Friends is broadly that the management of an agricultural estate involves a sufficient degree of personal attention and exertion as to convert the income derived from it from investment to earned income.
The hon. Member for Enfield, East (Mr. Mackie) said that one clearly should draw a distinction between the man who merely sits on his property and draws his rent and the man, like the friend of my hon. Friend the Member for Nor-

folk, South (Mr. John E. B. Hill), who drives his tractor about and has the help of three labourers.
The answer to what has been suggested is that, in a sense, however much the owner exerts himself, he is drawing income derived from allowing someone else to use his property. The rents themselves are not directly derived from his personal efforts, but from his entitlement under a lease or other agreement by which he has let his property to another.
My hon. Friend the Member for Worcestershire, South (Sir G. Nabarro) apologised because he could not stay for the full debate. I am not sure how far his arguments advance the case proposed by my right hon. Friend the Member for Taunton (Mr. du Cann). My hon. Friend the Member for Worcestershire, South talked several times about disequilibrium. He drew a distinction between the ownership of land which he saw as already entitled to certain reliefs by way of management expenses and, as he put it, the ownership of a portfolio where he might incur expenses—for instance, in completing his tax return—for which he is allowed no relief at all. It must have occurred to my hon. Friend that if we were to move in the direction suggested by the Amendment we would be widening that disequilibrium still further.
The investment income surcharge, as it will be, and the absence of earned income relief, as it is now, has from the beginning applied to the ownership of property in circumstances where the owner draws dividends, rents, or some other form of income from the property.
I should like to leave the matter in this way for the moment. We have a continuing review of the tax system going on, as my right hon. Friend the Chancellor of the Exchequer made clear, and he has sat throughout the debate and heard the arguments which have been put forward. The argument advanced by my right hon. and hon. Friends was put to us during our review. Indeed, I received a deputation. Therefore, we have already given a good deal of thought to the argument. But if we were to start moving the line in the direction suggested, it would be difficult to know where to stop.
My hon. Friend the Member for Norfolk, South said that it might apply to urban


properties as well. It would be extremely difficult to draw a distinction between ownership of agricultural land and ownership of urban properties. We therefore come back to the argument in the previous debate whether it is right to maintain a differential between earned and investment income. I do not want to repeat what I said before. However, the review is continuing and we shall certainly take this matter into account. I hope that my right hon. and hon. Friends will not feel that it is necessary to press my right hon. Friend to accept a change of this considerable nature this year when we are already making substantial reforms in our personal tax system.

Mr. du Cann: I should like to comment briefly on what my hon. Friend has said.
First, I thank him for the courtesy with which he has replied to this short but significant debate.
Secondly, I echo his words about the Chancellor of the Exchequer. It is very good of my right hon. Friend, in the midst of his many other preoccupations, to have sat through the whole of the debate and to have listened with such attention.
Thirdly, it would easily be possible now, or at some other time, to issue replies to some of the points which the Financial Secretary has made. This is not necessarily the moment to do that.
It is true, as my hon. Friend indicated both directly and by inference, that this is a subject of some complexity. On the other hand, there may have been a sense in the Committee this evening that here is just one of a multitude of examples where our tax laws, in the process of time and history, have become outmoded and introduce complications and anomalies which were never intended by their initiators, still less by this Committee or by this House.
That being so, whether it was intended when Schedule A was originally abolished or whether it is necessary at this moment, there is certainly a case for review. On my hon. friend's clear undertaking that that review will continue and that the points made tonight by my right hon. and hon. Friends and myself will be

looked into, I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Mr. Barnett: I beg to move Amendment No. 15, in page 26, line 36, leave out subsection (4).
This is a probing Amendment. We want to know what the Government have in mind here. This subsection probably stems from the case of Bucks v. Bowers, and I should be interested to know whether my assumption is correct.
The case concerned a partner in Rothschilds who went right through the gamut of the law. Eventually the judge expressed sympathy because he could not accept the case put forward by that partner. The case concerned a merchant bank, which has many dealings, where the investment income is part of the normal income of the partnerships.
7.30 p.m.
It may seem strange that someone from this Dispatch Box should find himself in sympathy with a partner in Rothschilds, but it is the principle about which I am talking. I accept the principle in this case, but what worries me is what is being opened up by this subsection, and I should therefore like to put some questions to the Financial Secretary.
First, what is the hon. Gentleman's estimate of the cost of this subsection, and how many people will benefit from it? If the subsection stems from the case of Bucks v. Bowers, how many other people have made representations to the hon. Gentleman that there was a need to put this subsection into the Bill, and how many people does he think it is likely to affect?
What exactly has the subsection in mind when it refers to an individual? What kind of firms have the Government in mind? Have they in mind brokers, merchant bankers, dealing companies generally, property dealers, and so on? What sort of things are they contemplating? Does the hon. Gentleman think that there will be a considerable amount of rental income which will become earned income as a result of this subsection?
I accept that in the main this concession cannot provide a large loophole for tax avoidance—because one would be converting investment income into capital gains, which would otherwise be taxed at


30 per cent., so it would all be comparatively modest—but there is, nevertheless, scope for a considerable amount of avoidance under the terms of the subsection by setting up, say, two trading companies. I therefore ask the Financial Secretary to tell us his definition of a trade for the purposes of this subsection.
We know that inspectors of taxes and the Revenue have never been prepared to lay down a definite ruling on what is a trading company. If, for example, a partnership dealing in property sells one property in a year, or perhaps two, or a partnership dealing in investment sells a few investments, what would be the position there? It has been difficult for the Revenue to say precisely what it would treat as a trade.
The matter becomes much more important because of the introduction of this subsection, as there could be opportunities for two or more people to join together and enjoy considerable tax avoidance by making themselves into a dealing company, either in property, or in investments. It would be of particular benefit if, as the hon. Member for Worcestershire, South (Sir G. Nabarro) said, someone employed his wife. With the disaggregation of the incomes of a husband and wife, the tax avoidance could be quite substantial.
I should like to know what the Financial Secretary has in mind with this subsection. It may be that, quite innocently, he is opening the floodgates for substantial tax avoidance. If the hon. Gentleman's reply to this probing Amendment does not satisfy us, we shall reserve the right, on Report, to ask the Committee to consider certain Amendments, but I hope that the Financial Secretary will be able to give us a satisfactory reply now.

Mr. Patrick Jenkin: I am grateful to the hon. Member for Heywood and Royton (Mr. Barnett) for putting his questions in such a modest form. I must tell him that I shall not be able to answer them all, but perhaps I can give the hon. Gentleman the background to the subsection. It does not stem from the Bucks v. Bowers case, which in a sense was an ordinary taxpayer's appeal, which stood on its own. It was not a case in which we felt it right to reverse

an unfortunate decision. The matter goes wider than that.
The justice of subsection (4) is, broadly. that where an individual or a partnership—it does not apply to companies—holds investments as stock in trade—that is to say where there is an investment dealing business, as opposed to an investment holding business—to lay it down that any interest or dividends which arise from the stock held as stock in trade shall be treated as part of the receipts of the business, and if the whole business qualifies, as one would expect it would, for the earned income relief, that interest, too would qualify.
The hon. Gentleman asked what sort of people would be affected. The obvious example is a stock jobber—not a stock broker—unless he is himself taxed as a dealer, which I suppose may be possible. The stock jobber is taxed as a dealer. The whole of his stock in trade consists of the investment that he holds, and it may be that, if he holds it for long enough, dividends accrue. Under the law as it stands, because of the technical interpretation of Section 530 of the Income and Corporation Taxes Act, those dividends canont be treated as part of the receipts of his trade so that they qualify for earned income relief, yet they are manifestly part of the income of the trade. They are part of the professional receipts of his business, and it is merely because they come in in the form of dividends that they are technically excluded from qualifying for the earned income relief. It is our purpose that in the new unified system that shall be put right, and the income shall not be charged with the investment income surcharge.
Let me give another example. The hon. Gentleman mentioned land. It is possible that there is a speculative builder who is holding land as part of his stock in trade, on which income may accrue. At present that does not qualify for the earned income relief. Nevertheless, it is quite clear that that income should be treated as part of the profits of his trade and, as such, together with the rest of the profits, and together with the turn that he makes on the transactions of buying and selling land, should qualify for earned income relief. Not many categories of people will be affected. One


can think of stock jobbers, merchant bankers, investment dealers, of whom there are not many, and, in respect of land, the speculative builder.

Mr. Barnett: The hon. Gentleman says that there are not many investment dealers. He will be aware that there is not much incentive under the present taxation system to be an investment dealer. If two people join together and put, say, £10,000 of their investments into a dealing partnership, which would be part of their stock in trade, would the investment income from that stock in trade be treated as earned income?

Mr. Jenkin: The hon. Gentleman, as a practising accountant, knows a great deal more about this than I do. It is always a question of fact whether a man is a dealer. If he is a dealer, he pays full income tax and surtax, or he will pay the full unified tax on all the profits that he makes on buying and selling his investments. If he is not a dealer, but merely an investment holder, he will pay only capital gains tax. In the first case, all we are saying in subsection (4) is that any dividends or interest which flow from his stock in trade as a dealer shall be treated in the same way for tax purposes as though it were the profit or loss that he had made on the turn. If the two gentlemen in the partnership are, for tax purposes, on a matter of fact, to be treated not as dealers but merely as holding investments, the Clause will not apply. They will be subject only to capital gains tax on any capital gains made on realisation of investments, and the position will be much as it is at present.
The hon. Member asked me for an estimate of cost. The amount of tax likely to be involved cannot accurately be estimated, but I am assured that it is not substantial. He asked what sort of tests would be applied to decide whether or not a person came within the Clause. That would be simply whether or not he was carrying on a trade, whether he was a dealer, whether investments were his stock-in-trade. That is a case which is decided according to the normal rules which are applicable and it is decided regularly both before the Commissioners and in the courts. This is a very modest

but very sensible extension of the kind of income to which the earned income treatment will apply. I hope very much that the hon. Gentleman will feel that we were right to put this in the Clause.

Mr. Barnett: I entirely accept what the Financial Secretary says and I am obliged to him for the way in which he has put it, but—perhaps he is not aware of this—he may have left the Bill open to a considerable amount of avoidance. I would reserve the right to consider this again on Report: meanwhile, I beg to ask leave to withdraw the Amendment.

Amendment, by leave, withdrawn.

7.45 p.m.

Question proposed, That the Clause stand part of the Bill.

Mr. Barnett: This is one of the most important Clauses in the Bill, dealing with the unified tax system. When he spoke earlier, on the main Amendment about investment and earned income, the Financial Secretary gave the Committee no information. As he honestly said, he could not give us any information about the slice of income. We were not talking about progression at that stage, and it is possible that he will now give us some more information. But, as it stands, we are being asked to accept a pig in a poke.
We were told originally that one of the purposes of the Clause was simplification of the tax system. Certainly that is what my hon. Friend the Member for Ashton-under-Lyne (Mr. Sheldon) and I had in mind when we were moving this type of Amendment year after year over the last six years. But now the Financial Secretary tells us, as he did an hour or so ago, that one of the main objects of the Clause is virtually to change the whole philosophy of our tax system, to change the taxing of investment and earned income so that it becomes very much more important.
We have already dealt with the question of investment income, but it is likely that many hon. Members and many people outside will not be aware of the effect of the Clause, for example, on the middle income groups. I am thinking particularly of the income groups between about £2,500 and £5,500, that is, where at the moment there is a £3,000 gap between investment income and earned income for the starting point of surtax.
Under the unified tax scale, we do not know where the Chancellor plans to start the higher rate. He says that he cannot tell us until 1973. He has not been prepared to give us any indication. But if he starts his higher rates at £2,500, all those on earned incomes whose surtax did not start until £5,500 will be paying considerably more. If, on the other hand, he starts at £5,500, he will be exempting a considerable amount of higher tax, previously surtax, for all those with investment income between approximately £2,500 and £5,500.
This will not only apply at the lower tax rates: it will work right the way through to the top scales. As the Chancellor has told us that the uppermost limit will be 75 per cent., that means that if he starts his progression at £5,500, there will be a further exemption of about £3,000 at 45 per cent. for people at the higher end of the tax scale, who will in other words, be receiving another £1,450. If it is at the lowest end of investment income, earners with, say, only £5,500, the £3,000 exemption at the lower rates will still be worth a considerable amount—about £500. So where he starts his progression is of fundamental importance.
I accept that the right hon. Gentleman cannot tell us what the tax rates will be in 1973. When the Financial Secretary said that he did not know what the "then Chancellor" would advocate, I saw the right hon. Gentleman a little disturbed at the prospect that he might not be in that position at that time. But although he cannot tell us what the rates will be, he could have given us examples of rates of progression—this sort of calculation must have been done in the Treasury—showing, for example, how one would raise the equivalent amount of tax as is raised today and what sort of rates of progression he would have, where he would start and the number of steps there would be.
For example, the White Paper says that it will be a more smoothly graduated tax—not as bad as the present surtax system. Presumably there will be very minimal steps. Is this what he has in mind? Where would he start? Does he intend to start at £5,500, or £2,500, or somewhere in the middle? Wherever he starts it will make a substantial difference to those on incomes in this range.
The argument on progression last year, with some justification, was that to start immediately at the threshold of 30 per cent. is not a good way to arrange a tax system. When my right hon. Friend introduced this last year, he said that the reason for it was the relief which he wanted to give at the lower end, and that this was one way of doing so. But I am sure that no one would suggest—certainly right hon. and hon. Gentlemen opposite at the time did not suggest—that we should stick at a rate of 30 per cent. for the threshold rate. I would welcome the right hon. Gentleman's observations on whether he might still be prepared to consider a threshold lower than the 30 per cent. level.
The Chancellor may say, "I cannot give you our calculations because by 1973 we may reduce direct taxation very much more." It is interesting to reflect that while the right hon. Gentleman has reduced direct taxation by about £1,000 million, leaving aside substantial charges elsewhere, the electorate do not seem to have been particularly grateful. What the voters did last Thursday may have a profound and traumatic effect on the actions of future Chancellors. Perhaps there is a moral here for the right hon. Gentleman.
Even if he does not plan to reduce direct taxation further, there seems no reason why he should not tell us what calculation he made to show what would have to be done to raise a given amount of taxation. We heard a great deal from hon. Gentlemen opposite before the election about a more open style of Government. The right hon. Gentleman now has an opportunity to adopt that style and to tell us what he has been doing at the Treasury. Indeed, he has only two choices. Either he has done nothing, and that is why he cannot give us these details, or he has done the calculations and does not want to be open enough to give them to us.
May we be told what effect the Clause will have on charities, which will to some extent suffer from the way in which this provision will work on covenants. Does the right hon. Gentleman have any concessions in mind? The word used in the Clause is "individual"—in that only an individual will be subject to the investment surcharge—and it seems that trusts and settlements will be able to avoid, and so


achieve a considerable reduction in, their tax charge by virtue of paying a considerably lower rate of tax than they have been paying in the past. This may be another inducement for people to set up trusts.
Cmnd. 4653 tells us in paragraph 12(a) that there is to be a "simplification of the tax structure". As the Chancellor knows, I have been advocating something along the lines he has proposed for a considerable time, though I do not recall hon. Gentlemen opposite affording me a great deal of support when I made my proposals. Paragraph 12(b) refers to a "smoother graduation" and it is clear that there should be, and I hope will be, a smoother graduation, though paragraph (b) adds:
while for the higher incomes successive slices of income above the band covered by the basic rate are charged on a smoothly increasing scale of rates.
What precisely is meant by that? Paragraph 12(c) deals with "incentive to earnings" and tells us:
This will remove the cause of the widespread misunderstanding about tax paid on extra earnings.
It is true that many workers were under the impression that they were paying 10s. in the £ on their overtime earnings, though the evidence on the extent of overtime worked by manual workers in Britain does not indicate that, while they might have thought that they were paying this sum in tax, they were working less overtime than their counterparts in other European countries. The evidence is that the number of hours worked in this country by manual workers is higher than the number worked in many other parts of Europe. This came out in inquiries conducted by the Prices and Incomes Board.
Nevertheless, there will clearly be an improvement when workers understand the true rate of tax they pay, and on another occasion we can discuss whether, from the productivity point of view, we want to encourage overtime. A case could be argued for discouraging overtime to obtain improved productivity.
Paragraph 12(c) points out:
by restructuring the tax in terms of earned income, the unified tax will secure that the nominal rate of tax on earned income is seen to be the true rate.

They may be somewhat surprised to find in the week following the introduction of this tax that their net wages are the same as they were under the old tax. This may come as a disconcerting surprise to them, after everything they have heard from hon. Gentlemen opposite about the wonderful things the Tories are doing. Is this likely to affect the way in which they will vote?
Paragraph 12(d) is concerned with "incentive to savings". We have had a great debate on this and I will not pursue the matter, except to point out that the Chancellor was, to say the least, obscure and that the Financial Secretary tried without success to explain his right hon. Friend's remarks away. On Second Reading the Chancellor told us that he had in mind only a "modest slice", whereas paragraph 12(d) of the White Paper says:
the incentive for personal savings will be materially increased".
On the one hand the right hon. Gentleman spoke of a "modest slice" while the White Paper refers to savings being "materially increased". Perhaps my idea of what is modest is different from that of the right hon. Gentleman. Does he have in mind a modest sum like £50, or might it be £500 or even £5,000? We do not know what the right hon. Gentleman envisages, though the Financial Secretary said that one of the main objectives was fundamentally to change the whole tax system as between earned and unearned income.
Paragraph 12(e) headed "Simplification of administration" concludes:
This will not only be a convenience for taxpayers but will, in due course, save a considerable number of Inland Revenue staff.
An assessment must have been made. May we be told what it is and how many staff will be saved? Whereas many assessments for a great number of taxpayers are issued perhaps once every three years, and sometimes the periods between are even longer, because of the investment surcharge an assessment will have to be issued every year prior to 5th April. It seems, therefore, that rather than there being a reduction in Inland Revenue staff, there will have to be an increase.

Mr. Sheldon: My hon. Friend will be aware that the Finance Bill is an unusual


Measure in that no estimate of staff costs or staff savings is included. This places an added obligation on the Chancellor to reveal this estimate or to tell us what extra staff will be required. It is imperative that he gives this information in view of the rules under which we operate with legislation of this kind.

Mr. Barnett: I agree with my hon. Friend, but as the Financial Secretary has not so far been very forthcoming in his replies, I hope that on this occasion the Chancellor will give the information for which I have asked, particularly bearing in mind what my hon. Friend said.
From what has happened during the debate and the way in which the Financial Secretary has spoken, I suspect that, under the cloak of reform and simplicity, we are here seeing a major change in the whole philosophical approach to our tax system. There are no magical formulae, as the public has learned to its cost, for cutting direct taxation without cuts in public expenditure, higher growth, or higher indirect taxation, or paying for public expenditure from private sources, which is what the Government have been doing.
While the Clause is not unfair and would do everything that I have always said it would do in terms of simplicity, what the Government propose to do with it would be to move to greater social inequality, which would be a recipe for further social strife. While there is nothing wrong with the Clause, I am very unhappy about the way in which, it seems, the Government are likely to use it. Unless better explanations are forthcoming, all the evidence is that the Government are leading us along a disastrous path. This is a shame, because the system which the Clause would introduce is a good system.

8.0 p.m.

Mr. Cooper: I sometimes wonder about the hon. Member for Heywood and Royton (Mr. Barnett), because he is an accountant and auditor by profession and, I believe, a reasonable man when thinking about these matters. But what we should realise—[Interruption.] Could the Labour Front Bench, Captain Elliot, take some part in the debate?

Mr. Barnett: Every word is a gem.

Mr. Cooper: I do not wish to be discourteous, but if the Opposition want a private meeting, there are rooms outside the Chamber where they can have it.
Fundamentally, the Clause deals with the differentiation between earned and unearned income.—[Interruption.] Shall I sit down, Captain Elliot, while the Opposition determine their position on this matter?

The Temporary Chairman (Captain Walter Elliot): Order. I hope that there are not too many interruptions from a sedentary position, but I do not think that up until now they have been very severe.

Mr. Cooper: Thank you, Captain Elliot. The Clause deals fundamentally with the differentiation between earned and unearned income.

Mr. Taverne: indicated dissent.

Mr. Cooper: Yes, it does. Many of us on this side of the Committee feel that all income, whether it be from dividends, salaries or wages, should be regarded as income. Historically, over 50 or 75 years, many incomes were derived from lands and so on which were not earned by the people in possession at that particular time, but, as the years have progressed, this is no longer true. I challenge hon. Gentlemen opposite to ascertain the numbers of their constituents who have saved some money over the years, out of their earnings and who, when they reach pensionable age, are trying to get some income from it. It is no use saying that there are people earning £10,000, £15,000 or £20,000; these people are the minimal. The people who are earning and enjoy shareholdings in this country are the people in the £2,000 to £3,000-a-year bracket. When one learns, for instance, that a loo-lady in the Ford Motor Company can earn about £2,000 a year, it is not difficult to see how small savings can be built up.
To hon. and right hon. Gentlemen on the Front Bench opposite, I say that if they save from their salaries £1 or £5 per week, or £10 per month, and put that money into war savings, war bonds, or something else, that is not unearned. It is money that they have earned. Their expenditure has been less than their income, and they have deferred the


benefit and put the money into some sort of savings and, at a date determined by them, they will reap the benefit from it. How can it possibly be argued that this is unearned income?
I very much doubt whether there is one hon. Member opposite who has not, throughout his life, put some savings into some sort of funds, whether it be into his house or something else. Would he say that that was unearned income? Of course it is not. These are his savings, the result of his life's work, about which, at a certain time in his life, he is entitled to say, "I shall now get some reward for my work over the past years".
I am happy if any hon. Gentleman can say that as a result of his years of work he has been able to save something. I remind the hon. Member for Heywood and Royton, and other hon. Members, that within the last fortnight the wills of two late members of the Opposition have been published. They died within the last few months. One Member left over £100,000 and another left over £20,000. I have no envy or malice. I am sorry that they died. But why should they or their families be penalised in any way because they have left this money? Why should anybody earning this sort of money be penalised? One is entitled to leave money to one's children and dependants.
There is no difference between earned and unearned income. The money I earn is earned by the sweat of my brow. I pass it on, as I can, to my dependants, who carry on and earn more money from then on. To win a football pool is quite a different matter. But income is income if it arrives in the normal way, and all income, other than from extraneous sources such as football pools, should be regarded as income and taxed on the same basis.
I have not made the calculation in my constituency but I should be willing to bet that the pattern is the same as in the hon. Gentleman's constituency. I reckon that I have at least 2,000 to 3,000 families part of whose income is derived from the savings and earnings of the generation preceding them. Is the hon. Gentleman saying that it is wrong that that should be so? What he is trying to do now is to deprive these people of part

of the income that their fathers and mothers have built up for them. As I have said many times in the House, the income we derive from direct or indirect sources should be regarded as income and taxed accordingly.

Mr. Denzil Davies: The hon. Member for Ilford, South (Mr. Cooper) seemed to be under a misapprehension about the terms "earned income" and "unearned income". It has never been suggested that a person's savings were called either "earned income" or "unearned income". We are concerned with the income from the savings; it is that which we call "unearned income" and which has not been earned by the sweat of a person's brow.
I want to draw attention to an aspect of the Clause which I had hoped to raise in the debate on Amendment No. 16, if it had been selected. This relates under the terms of the Clause to the retained and accumulated income of trustees. The Clause seems to provide that such income will be taxed only at the basic rate which Parliament shall determine. I assure hon. Members opposite that I am not now concerned with their small savers. I am concerned more with those whom the Financial Secretary described in a colourful phrase as "bloated capitalists".
Should Parliament determine that, in addition to the basic rate established by the Clause, incomes above a certain level should also be taxed at the excess rates and that investment income should suffer an additional rate or a surcharge, as the Clause stands the income which trustees retain and accumulate and do not distribute not only is not taxed at the excess rates but also is not taxed at the additional rates in relation to investment income.
On Second Reading I asked the Financial Secretary whether my interpretation of the Clause was correct. Unfortunately, at that time the Financial Secretary was more concerned with regaling us with a list of firms which he said had reduced their prices as a result of the cut in S.E.T. It is a pity that the hon. Gentleman did not shout a little louder on that occasion, because clearly the electors did not hear him. I hope that the Chancellor will deal with this point later.
As the Committee knows, under the present law the accumulated income of trustees—income which they receive, retain and turn into capital—is taxed at the standard rate, which at the moment is 38·75 per cent. Trustees are not entitled to obtain earned income relief; therefore, their effective rate is 38·75 per cent. They do not, however, pay surtax. This is an anomaly of the present system, an anomaly which is created directly as a result of having differing rules for income tax and surtax.
The Chancellor announced in his Budget Statement that he would put an end to the state of affairs whereby there are two taxes—income tax and surtax—in respect of income, each tax with its own separate rate. Despite this promise and these pronouncements, this previous anomaly in relation to the income of trustees is retained by the Clause, because the accumulated income of trustees will still be taxed only at the basic rate—that is, at the lowest possible rate, whatever may be the size of the income and regardless of the fact that in most cases such income will be investment income.
Indeed, if the basic rate is fixed at 30 per cent.—that is, 38·75 per cent. less the present earned income relief—trustees will get a reduction in their tax, because they will be given what we now call earned income relief in relation to investment income. I am surprised that the Government have not announced during these debates that their plans provide for a reduction in the tax paid by trustees.
8.15 p.m.
Therefore, the Clause should in fairness be amended, for two reasons. First, an Amendment along the lines that I am suggesting would accord with the Chancellor's proposals for tax reform. The Clause introduces a new, unified tax system, in place of income tax and surtax each with its separate rules. Because we have this reform there is no valid reason for preserving in the new system one of the major anomalies which was created by the old law whereby trustees were treated differently from all other taxpayers.
Indeed, if the Government allow this anomaly to continue and persist in the new system we can only conclude that they are merely interested in tax reform

so long and in so far as such reform benefits their own wealthy supporters. When any changes are likely to conflict with the financial interests of these people, reform stops abruptly and anomalies are allowed to continue.
Second, the Government should look at the Clause again on the grounds of equity and fairness between different taxpayers. If the Clause were allowed to become law in its present form, a person earning a salary of, say, £20,000 a year would almost certainly pay income tax at a marginal rate of what might be 50 per cent. We do not know what the bands and rates will be. Trustees who received dividend income of £20,000 a year and retained that income would pay tax in relation to dividend income at the basic rate only. I assume that the basic rate will be 30 per cent. None of the excess rates would apply to trustees, nor would the investment surcharge. Although the whole of the income was investment income.
The anomaly created by the Clause goes much further. The hon. Member for Ilford, South spoke about Ford workers. Let us take the example of a Ford worker earning £40 a week. His marginal rate of tax would probably be 30 per cent., again assuming that to be the basic rate and assuming that the lowest band will not stop below £2,000 a year. Trustees who receive dividend income of £100,000 a year and who retain that income and turn it into capital would pay tax at exactly the same rate as the Ford worker earning £2,000 a year.
This is an extraordinary situation of trustees with investment income 50 times that of an individual's earned income paying tax at exactly the same rate as the individual on his earned income.
Hon. Members opposite have argued that the differentiation between earned and unearned income and investment income should be abolished. I have not heard them argue in public that a situation should be created whereby unearned income should be taxed at a lower rate than earned income in many cases, as it will be if the Clause becomes law.
If there is any difficulty about amending the Clause—if the £12,000-a-year parliamentary draftsmen are incapable of doing so—may I humbly suggest that they take note of Amendment No. 16. However, the Government should amend


the Clause because it produces such extraordinary and inequitable results. If they do not amend it, we on this side can only conclude that they are unwilling to amend it because such an Amendment would bring the Tory Party into conflict with its wealthy supporters. After all, it would not do for the trustees of these people's family trusts to be treated like other taxpayers.
The Clause in its present form and as it applies to the accumulated income of trustees militates against one of the fundamental principles of our taxation system—that it should be fair and equitable between different taxpayers. For this reason also, and in the interests of tax reform, I ask the Government to look at the Clause again so that the accumulated income of trustees is taxed on the same basis and at the same rates as those applicable to everybody else.

Mr. Hugh Dykes: The hon. Member for Llanelly (Mr. Denzil Davies) raised a relatively esoteric matter. I hope that he will accept my apology if I do not deal with that subject.
We have had in the debate on the earlier Amendments, and the statement by the hon. Member for Heywood and Royton (Mr. Barnett) in this debate, yet another indication of the confusion among hon. Members opposite about the Clause and the realities in modern terms of the differences between so-called investment income and so-called earned income. It was somewhat depressing again to have repeated indications that they were not prepared to move from their philosophy of 20 or 30 years ago, and even longer ago, about those differences. It was depressing, because there is a widespread public acceptance that the old philosophical differences reflected in tax differences should be swept away. They have ceased to be doctrinal in the traditional sense for either party.
There is in our society equally an exasperation with the old shibboleths and a desire for whatever Administration is in power to get rid of them. The present Conservative Government had the opportunity. We on this side doubt very much whether a Labour Administration would have had the courage to accept those modern realities.
I and a number of my hon. Friends tabled some Amendments which were

not selected, and we understand the reasons. I should like to put forward one or two thoughts for consideration by my right hon. Friend the Chancellor and my hon. Friend the Financial Secretary. We wholeheartedly accept my hon. Friend's assurance that the spelling out of specific rates and percentages and the giving of precise figures now was impossible for administrative and structural reasons, but it would have been helpful to have some indication of the possible modalities of the future rates of taxation. May I draw attention to our Amendments Nos. 8, 9 and 10 as follows

No. 8, in page 26, line 17, leave out 'such rate, to be known as the basic' and insert:
'a basic rate of 30 per cent. or such other'.

No. 9, in page 26, line 20, leave out from beginning to 'rates' in line 21 and insert:
'is represented by slices of income taxed at above the basic rate, as determined by Parliament, at rates of 45 per cent., 60 per cent. and 75 per cent. or at such'.

No. 10, in page 26, leave out lines 25 and 26 and insert:
'at such additional rate or rates as Parliament may determine, for 1973–74, these additional rates to expire subsequently in respect of the next year of assessment'.

These might have provided helpful additional guidelines to incorporate in the Clause, particularly in indicating what kind of rates, what kind of steps, were in the Government's mind, even though the whole subject is to be debated not only in the House but through the revolutionary and fascinating media of Green Papers and the White Paper on personal taxation. Therefore, I very much welcome the Clause in its entirety, its principles and the concepts behind it.

The confusion among hon. Members opposite was shown once again halfway through the debates on the Amendments when we had the curious spectacle of right hon. and hon. Members opposite postulating the idea of a £50 threshold between earned and unearned income and at the same time seemingly arguing against subsection (b) (the additional paragraph) as if the Government had not enunciated in it the principle of a different treatment with higher rates after the first slice for unearned income. On this side there was the perhaps equally interesting spectacle of one or two of my


hon. Friends honestly and fervently arguing that the differences between earned and unearned income should be swept away at long last, yet supporting that additional paragraph. Back benchers on this side must only guess what is in the Government's mind now and what will be in their mind in two years' time when these matters have been debated more fully. I hope that the principle of the gradual disappearance, or at least the diminution, of the differential on unearned income, even at rates applicable to income slices higher than the threshold, will be considered by the Government. This matter may not be of the highest political priority today. Some right hon. and hon. Members opposite would even put it lower than that.

I believe that within the framework of what the Government propose in the Clause is a principle that the country will now be very happy to accept, and that there is the possibility of considering going further than the additional paragraph suggests. That is why rates were suggested in a number of Amendments, and why it was suggested that the investment surcharge might lapse even after Year 1. Paragraph 12 (b) and (d) of the White Paper suggests that that might be precisely the possibility later. I do not wish to go further now than merely to state the possibility, but it is my fervent belief, which I think is shared by my hon. Friends, that the anachronistic support for the idea that there should he different treatment for income deriving from investment of any kind, whether institutionally-organised, privately-organised, inherited or created out of the sweat of one's brow through earnings. These differences are anachronistic, undesirable and totally unacceptable to increasing numbers of the British public. It is in that spirit that I wholeheartedly support the Clause, while suggesting these other details for possible future action.

Mr. A. E. P. Duffy: I may welcome the Clause, as many of my hon. Friends have, because of the reform that it involves, but I still wish to look closely at some of its implications. That is why, like my hon. Friend the Member for Heywood and Royton (Mr. Barnett), I want to look closely at some of the claims made for the Clause on page 6

of the White Paper, especially the first one which the Financial Secretary dealt with at length earlier in the debate—the incentive it provides to savings. I want also to look at the claims made for the incentive to earnings, a smoother graduation ultimately, and finally simplification of the tax structure.
On the incentive to savings, I cannot resist repeating what some of my hon. Friends have said about the great disparity that opens up between the treatment of people on £20,000 a year and above and those at the other end of the income scale. Those on £20,000 and above who are now to suffer a sharply reduced cut-off of surtax will receive as a result of the proposed new structure of income tax nothing less than a bonus. Their incomes have been computed not merely on the basis of the present cut-off rate but of the one that obtained last October, before the Chancellor's first reduction. Those receiving an income of more than £20,000 a year will get a correspondingly larger relief, £2,000 and upwards.
Of the people at the other end of the scale, Peter Harvey's survey in the Guardian during Budget week shows that the proposed changes give less than meets the eye to ordinary families and nothing to a man earning £40 a week. One arrives at this conclusion if one only takes into consideration the charges for medicine, school meals and milk as well as the increased National Insurance contributions. If we add the higher rail fares because of the withdrawal of the subsidy and higher food prices as a result of the change to levies, most better-paid manual workers are worse off. The Financial Secretary may now understand why some of my hon. Friends at an earlier stage were asking what savers he had in mind.
8.30 p.m.
I turn now to incentives to earnings. I want to refer here to the amount that a man can spend out of every £1 extra he earns. All parties in this House are supposed to accept the idea of a progressive tax system—that is, a system which takes proportionately more from the rich than from the poor. Yet a recent survey in the Political Quarterly suggested that for people on £16 to £20 a week there is, effectively, an income tax of 100 per cent. It makes no difference


how much one earns in that band because one loses benefit as fast as the money comes in. On two counts, therefore—12(d) and 12(c)—we are entitled to wonder just how Clause 22 is going to work out and just what some of the implications of the proposed tax structure after reform will be.
What of the claim, to be found in 12(b), of a smoother graduation? If we just take income tax alone and those features introduced or modified by the Chancellor, we find that those earning less than £42 a week, except those in real poverty, pay a higher effective tax rate than someone with, say, £5,000 a year, and in one or two income bands pay more than the top rate of surtax. The tax gradients will need to be looked at very carefully. The high rates start just above the poverty line—as soon as a family ceases to qualify for the full rate of the family incomes supplement. This is tapered off at a rate of 50p for every £1 of income above the border line, so in this band the earner loses just half of every extra £ 1 he earns. There is need, indeed, for a smoother graduation but much more radical adjustments will be called for—more on the lines suggested by some of my hon. Friends on Clause 7.
With the new earned income allowance of 15 per cent., other people have to climb two or three rungs up the surtax ladder to lose as much as that, as Anthony Harris pointed out in The Guardian a month ago. The National Insurance contribution is now graduated, of course—that is, it varies with income, just like tax, and it takes 4·35 per cent. of income in the band between £18 and £42. It means that as soon as the F.I.S. gives out and income tax sets in, the rate is not the 30·2 per cent. which is the effective rate on earned income which has often been mentioned in Committee, despite the many qualifications which have been made during the last month by my hon. Friends, but 34·55 per cent.
Thus, of the first £100 earned above the poverty line only 65·45 is left for spending, and of that sum, according to the moderate estimates used in the Peter Harvey survey, £31·90 goes in paying for milk, medicines and school meals, which come free if the income is lower. Thus, a working man who raises his income by £100 above the official poverty line is left with just £33·55. It was pointed out again

last week in the debate on Clause 7, although in a slightly different context, that one has to get high up the surtax tree to be penalised quite so severely.
Even up to £42, the marginal rate does not fall below 34·55 per cent., based on income tax, earned income relief and National Insurance graduated contribubutions. It is only above £42—the ceiling for graduated contributions—that the marginal tax falls to 30·2 per cent. of the reduced income tax, and these figures take no account of means-tested benefits, such as council house rent rebates. Despite the proposed reforms, I am driven to joining my hon. Friend the Member for Ashfield (Mr. Marquand), who proposed a wealth tax. Clearly too big a price is being paid for 12(a) to simplify the tax structure in terms of social justice and loss of revenue.
Is there not a case for counter-balancing with a wealth tax that would also recover lost revenue? Moreover, if capital is taxed rather than the yield on it there might be more incentive for the efficient use of assets. In this way real rather than spurious expectations might be entertained about the stimulation of incentives, for savings and earnings.

[MISS HARVIE ANDERSON in the Chair]

Mr. Rost: I hope that the hon. Member for Sheffield, Attercliffe (Mr. Duffy) will forgive me if I do not follow him in his arguments, except in so far as they highlight one fundamental fact, namely that in my view it is Labour's failure to grasp the need for this country to create wealth rather than to redistribute it or to dissipate it which is at the root of the failure of that party in Government and at the root of our difficulties as a country.
The hon. Member suggested that Clause 22 represents a fundamental change in philosophy in our taxation system, and he is right. Hon. Members opposite have highlighted the very point which we ought to be making. Clause 22 is one of the most important parts of the Budget. It allows us to pinpoint the schizophrenic attitude of the Labour Party over many years in that on the one hand it has said that we ought to be encouraging personal savings while on the other it has, when in Government. passed fiscal legislation which penalised


savers. I have never understood why it should be the policy of hon. Members opposite to try to make suitable hypocritical noises about encouraging savings and then to do everything possible to penalise the saver once he becomes a capitalist. A man cannot save without becoming a capitalist.

Mr. Dick Douglas: The hon. Member has accused some of my hon. Friends of being schizophrenic. We have never penalised savers. We are talking about continuing the distinction between income flows. If an income flow is from earned income it would be taxed at one rate, if unearned it would be taxed at another. We are simply seeking to draw that distinction.

Mr. Rost: I have to disagree. It is very much a disincentive to savers, and this is the root of our trouble. For too many years there have been such disincentives, and the result is that our average level of personal savings per capita related to income is much lower than in our competitor countries. They are saving a far higher proportion of their personal income, and I maintain that the reason is that there is greater incentive for them to do so.
I have three principal reasons for supporting this Clause. First, in stimulating savings this change in the tax system will mount a major attack on inflationary pressures. For that reason alone I would have thought that more hon. Members opposite would have seen the sense in supporting any such measure. Personal saving is deferred spending, and this is what is needed to relieve inflationary pressures. Why should I, as a family man, be penalised for deferring the spending of some of my earnings? Why should my family, who have not had the benefit of the extra spending power, be penalised later? By depriving myself and my family of some of my present earnings, I am accumulating capital for them from which they will later benefit.

Mr. Taverne: The hon. Member is doing his best to persuade us to vote against the Clause, but he will not tempt us. What he is saying relates not to the Clause but to his interpretation of it. The Clause provides for an additional rate of investment income. How much this is

and where it applies are still to be decided. The hon. Member must not say that this is what the Clause does, because we take a different view.

Mr. Rost: I accept that we are arguing about the principle of the change in the tax system. The exact amount of the tax change has yet to be announced, but we are agreed that this is a fundamental change of principle. The long-accepted two-class definition of so-called earned and unearned income is now to be swept away—

Mr. Barnett: No.

Mr. Taverne: Read the Bill.

Mr. Rost: This will help the fight against inflation. It will stimulate personal savings and thus encourage more self-reliance. I fail to understand why hon. Gentlemen opposite are so opposed to personal incentives for savings which over the years will encourage people to provide more for themselves and so relieve the pressure on the National Health Service, education, State pensions and even on housing.
By creating greater wealth through personal savings with suitable incentives, the greater proportion of the popoulation will be encouraged to provide more for themselves. It is surely a social service to stimulate and encourage personal savings, which will relieve the majority of the taxpayers of a considerable burden.
The whole purpose of the change in taxation has been completely misunderstood by the Opposition. The real reason for virtually abolishing the differential between earned and unearned income—

Mr. Taverne: The Bill does not do this.

Mr. Rost: The real purpose is to encourage the creation of capital. We have sadly missed this in the past, with the result that we are now seeing a high rate of unemployment which is largely due to the lack of capital investment. Hon. Gentlemen opposite should not oppose this change in taxation unless they also wish to see the country sinking lower down the ladder in the world league in relation to reinvestment and capital investment. If we want to revive the rate of growth through fresh capital investment and modernisation and if we want to return to full employment, we must accept that capital has first to be created.


The only way in which it can be created is by stimulating personal savings in this way, rather than dissipating them. We must accept that the large proportion of income which derives from savings is not spent. The bulk of it is usually invested and provides the future capital that is so badly needed. It is for this reason, above all others, that this change in the tax system will fundamentally alter the prospects for the next few years.

8.45 p.m.

Mr. Loughlin: I am able to accept a great deal of what was said by the hon. Member for Derbyshire, South-East (Mr. Rost). He said that the Clause was intended in future years to give relief to unearned income and that it will thereby be an incentive to saving. Although I agree with that statement, there are many other statements made by the hon. Gentleman with which this side of the Committee would be in almost total disagreement.
I wish to refer to the discussion in which I participated earlier on Clause 22(1), and I apologise to the Committee for not having heard all the speeches on the Question, That the Clause stand part of the Bill. I argued a little earlier that the subsection would have a peculiar effect in the light of many statements made by the right hon. and hon. Gentlemen opposite, in particular by the Chancellor of the Exchequer, on the increase in disposable income for large sections of the community in the last 10 months.
I happen to be associated with the trade union movement. Throughout that period of time nobody has been more hopeful than the Chancellor in arguing that there was something wrong in principle, or almost unclean, about the fact that industrial workers have attempted by wage increases to secure an improvement in their standard of living. We now have those same right hon. and hon. Members opposite arguing that there is something particularly virtuous in increasing the disposable income of people who invest money. Such people, without lifting a finger, can have a substantially higher disposable income than can the man and woman in the factory who works for 52 weeks in the year.
I am sorry that the hon. Member for Ilford, South (Mr. Cooper) is not in his place, because I gave him notice

that I intended to refer to him when I spoke on the Question, That the Clause stand part of the Bill. The hon. Gentleman made some rather scathing remarks about me and said that my knowledge was "marginal". I pay the hon. Gentleman a similar compliment by telling him that his ignorance is colossal. He even referred to my speech last night on an entirely different matter. He said that it was out of order, that it received no rebuke, and that I spoke for 45 minutes. He was even wrong about that. I spoke for 47 minutes. I hope that the hon. Gentleman will take note of it and be more accurate in what he says in future.
The hon. Gentleman spoke about someone who, in some way or other, acquired £1,000 and invested it. He said that, whatever happened, both the capital and the interest were earned income. If he did not mean that, I have misconstrued what he said. I accept that the £1,000 may well have been earned income. However, if I have £1,000 and I invest it, perhaps not in Rolls-Royce, Vehicle & General, Falcon, or the Mersey Docks and Harbour Board, but in a successful company, though who knows how many companies will remain successful for long under that lot on the benches opposite, the £1,000 that I have invested is earned, but the interest arising out of the £1,000 is unearned.
Whatever accrues from my investment of £1,000 is consequent upon the application of the investment to the skill and the labour of those engaged in the industry, whether they be management personnel or workers on the factory floor. The interest is not earned by me. It is earned by the management and the workpeople in the factory.

Mr. Dennis Skinner: By the workers. My hon. Friend must not go too far.

Mr. Loughlin: My hon. Friend tempts me. However, I accept that management personnel, by virtue of that application of their brain power and talents, are equivalent to the workers on the factory floor.

Mr. Skinner: My hon. Friend is mellowing.

Mr. Loughlin: The point is that I do not see any virtue in receiving interest on an investment and having it treated as earned income.
The Financial Secretary says that the Clause is merely a preparatory procedure for 1973. The Chancellor of the Exchequer will correct me if I am wrong, but the purpose of subsection (1) is to prepare the ground for giving increased relief on invested income in 1973; that is if I can take what the Financial Secretary said as a reflection of the Chancellor's intentions.
I see no virtue in making this concession to people who do not lift their little finger. If I invest £1,000 in a company I do not lift my little finger towards increasing the wealth that accrues to me by way of interest payments. They are entitled to an improvement in their disposable income, whereas the Chancellor of the Exchequer, together with the Prime Minister and the rest of his colleagues, persistently says that a person who works in a factory is a bit of a scoundrel if he demands an increase in his disposable income.
The Financial Secretary—I do not know whether he was being facetious or scathing; he is not here, but I should have welcomed his being here—said that he would deal with the rest of my hon. Friends, but would deal with me separately because I did not believe in savings. Of course I believe in savings. I am concerned whether in practice a concession of this kind will improve savings. It may or it may not. I do not know.
By and large there are two forms of savings, taking the generality of the population. There are what I call compulsory savings, which are to be found in the superannuation schemes, and there are voluntary savings. I imagine that the Financial Secretary was talking about voluntary savings, not compulsory savings. Most people who participate in compulsory superannuation schemes save on the basis of weekly or monthly superannuation payments, and the trustees of those schemes, irrespective of the tax position and the rate of investment, are charged with investing that money to the best possible advantage.
The compulsory aspects of savings are a pretty substantial part of all savings in this country. The subsection will not influence the degree of savings one iota in that respect.
I can only assume that when the Financial Secretary was being scathing about me, he was talking about voluntary savings. From time to time voluntary savings change. An indication of a low degree of confidence in British industry is when savings go into the building societies. I am amazed that the Government, in the light of what they have said in the last 10 months, need to induce people to save. We have had repeated boasts by right hon. and hon. Gentlemen opposite that since they have come to power savings have gone ahead every week.
9.0 p.m.
If savings are improving to the extent that the right hon. Gentleman and his colleagues claim, why should we give people a further inducement on the basis of tax relief of this kind?

The Chancellor of the Exchequer (Mr. Anthony Barber): Because we want people to save even more.

Mr. Loughlin: I am glad that the right hon. Gentleman intervened, but at what point do we say that we have reached the position that disposable incomes are being saved? I am never too sure about that, and I should be grateful for some tuition by the Chancellor of the Exchequer. It may be that I live in a different kind of world.

Mr. Cooper: In an Alice in Wonderland world.

Mr. Loughlin: That is the hon. Gentleman's view. It may be that I do live in a different world, but can anyone tell me what happens to the money which represents the difference between the sum required to live at a given standard—and we all live to different standards in society—and that which represents a person's disposable income when, according to right hon. Gentlemen opposite, there is no inducement to save? Does anyone suggest that the difference is not saved? What the devil do they do with that money? Do they throw it away?
The hon. Member for Ilford, South said that I was living in an Alice in Wonderland world. Does anybody imagine that people do not save the money that they have left after spending what they need to keep themselves at a given standard? If there is an absence


of inducement to save, what do people do with their money? Of course people save, but they cannot save if they do not have money left over after paying out to maintain their standards.
What we have heard from right hon. Gentlemen opposite is a lot of boloney. It is the biggest load of hooey that I have heard. It is a device by which they fool people into believing that they, the Government, are acting in the best interests of the country, when in fact all that they are doing is looking after their own. Right hon. Gentlemen opposite can talk until they are blue in the face. To the majority of people a proposal of this kind will not matter a damn. The only people who will benefit—and the Chancellor knows this better than I do—are those whom he wants to look after. This is just another indication that the Conservative Party—

Mr. E. Fernyhough: I think that my hon. Friend has overlooked one section of compulsory savers whom the Chancellor, too, has forgotten, and to whom he still owes about £160 million, the interest on which amounts to £44 million. I am referring to those who own post-war credits. Does my hon. Friend think that it would be better for the Chancellor to repay that debt before giving surtax payers any more relief?

Mr. Loughlin: I am very grateful to my right hon. Friend. Some Government should consider our moral responsibility for paying post-war credits. I cannot stand in a white sheet of innocence because, like my right hon. Friend, I was a member of the Labour Government and we did not repay post-war credits—[HON. MEMBERS: "Shame."] I know it is a shame, but, sooner or later, some Government, whether this Government or a Labour Government in four years time—

Mr. Skinner: Less than that.

Mr. Fernyhough: This year, on the Common Market.

Mr. Loughlin: No, the fact that we won 2,800 seats in the local elections last week does not mean that we will get a General Election this year.

Mr. Cooper: The right hon. Member for Jarrow (Mr. Fernyhough) obviously

read the answer to my question to the Chancellor on this subject yesterday. I am glad that he thought it important enough to take notice of.

Mr. Loughlin: I am delighted to know that the hon. Member for Ilford, South has now become warm. The fact that he is actually putting down questions suggests that he is almost alive. I am delighted that he is with us. It is only a pity that he was not here in the early part of my speech, when I gave notice that I wanted to refer to him.
But let me conclude my remarks—

Mr. Ernie Money: Hear, hear!

Mr. Loughlin: I expected that. I have been long enough in the House to remember what I said when someone made a remark with which I did not agree.
My right hon. Friend the Member for Jarrow (Mr. Fernyhough) questioned the payments of post-war credits and I said that I was in a difficulty because I had been a member of the Government before the last General Election—

Mr. Skinner: Stop bragging.

Mr. Loughlin: —and we did not deal with them. But at least we did not give concessions to surtax payers, to those rich enough to go without concessions. This Government are giving these concessions and are still not repaying post-war credits. This debate is in keeping with this Government's general philosophy, which can be summed up in a very succinct phrase—they will give to the rich and they will take from the poor.

Mr. Gower: The final remarks of the hon. Member for Gloucestershire, West (Mr. Loughlin) revealed how far we have travelled from those days when it was deemed desirable that savings should fructify in the pockets of the people and when it was considered a virtue for people to practise the quality of thrift.

Mr. Loughlin: Oh dear!

Mr. Gower: It is all very well for the hon. Gentleman to "Tut, tut" at the idea of thrift. It is not easy to persuade people to save. Indeed, it is much easier to spend than to save.

Mr. Loughlin: One must have something to save.

Mr. Gower: Even the person with a modest amount of money can exercise self-indulgence rather than thrift. Every incentive is displayed these days to tempt people to spend rather than save.

Mr. Loughlin: That is private enterprise.

Mr. Gower: The policies of the Labour Government were not conducive to thrift.

Mr. Loughlin: The hon. Gentleman fascinates me.

Mr. Gower: I hope that the fascination will extend to making the hon. Gentleman reconsider his attitude to saving.
The paramount advantage of the Clause, as my right hon. Friend said in his Budget Statement, is the undoubted simplification of the tax structure that it will make. This simplification has been applauded by hon. Gentlemen opposite. It will also be an incentive to earnings. Hon. Members who represent industrial areas will be aware how people have been dissuaded from working overtime because of the feeling that much of their earnings were taken in tax. They tended to over-estimate this because of the existence of the basic rate. Now the rate will be seen to be the true rate, and this will enable people to know roughly the amount to be deducted from their extra earnings.
Above all, the Clause demonstrates our attachment to the importance of savings. In the much-maligned Victorian era, Britain had many failings, but it had the virtue of thrift. People believed in saving, self-help and hard work. The history of the last half-century is full of instances of people of humble beginnings establishing considerable enterprises and so creating the wealth of the nation. We must encourage those virtues now. If we do not, the outlook is bleak.
The competitive world of today demands not only successful work but good earnings. I assure hon. Gentlemen opposite that we, too, believe in a high-wage economy, based on performance. If we can produce our goods competitively, we want to see our employees earning more. A disquieting factor now is that many of our trading rivals in Europe have performances which enable them to pay their employees more than we can afford to pay ours. Let not the hon. Gentleman be under the illusion that we

object to better earnings. The people of this country need better earnings.

9.15 p.m.

Mr. Fernyhough: I am intrigued by the hon. Gentleman's argument. I presume that when he refers to the higher wages that workers on the Continent are getting, over and above British workers, he will also accept that our workers, when and if we enter the Common Market, which we shall not do with my blessing, would be entitled to comparable wages. Since British workers' wages are about £7 per week lower, on the basis of the advertisements, what are the Government doing to raise our workers' wages to the levels of those paid on the Continent?

Mr. Gower: The Government believe in the performance of industries to provide better wages. There are both nationalised and other industries in the continental countries, all of which seem to be able to do this. It may be due to the better and larger market, although it would be out of order, most indiscreet and unacceptable for me to discuss the question of the Common Market.
I hope that we shall be able to pay far better wages in industry in the years ahead. At the same time, we need more savings. We do not want only the compulsory savings, to which the hon. Gentleman referred. He seemed to think that there is an extra virtue in savings obtained by compulsion, whether by the State or by large organisations and institutions. We want to see a large growth in voluntary saving, the savings which flow into the arteries of our industry and could make it greater than it is today.

Mr. Loughlin: The hon. Gentleman has repeatedly referred to me, and I have tried to be tolerant and not to intervene. He must not misconstrue what I said when I spoke of the difference between compulsory and voluntary savings. I was not arguing the pros and cons of it but merely analysing the saving content. He must not imply that I was either in favour or against compulsory savings or voluntary savings. I was merely examining the component parts of the savings system.

Mr. Gower: I am grateful for that correction, but it is somewhat different in tone from the hon. Gentleman's speech.

Mr. Loughlin: No.

Mr. Gower: In speaking earlier, the hon. Gentleman wondered what particular virtue there was in saving. He put that question, and he will see it in HANSARD tomorrow.
Perhaps we need not worry too much about the established or the wealthy saver. But the saver from the middle income group, especially the new investor, is of a tender breed and can easily be dissuaded by some harsh experience. Earlier in the debate some hon. Gentlemen spoke as though all the savers we have in mind have the benefit of expert advice, large portfolios and so on. But we want to attract into saving the sort of person who has not a great experience of saving or investment.
In recent years there have been many instances of people who have acted very foolishly when investing for the first time. In my constituency a man put practically all of his fairly modest savings into one rather expensive share—Rolls-Royce. It seems incredible that a man of very limited means, who had saved out of his modest income, should have put all his money into that one share. That shows that many people are without large portfolios or expert advice. Many such people have been deterred from saving or from investing by unfortunate experiences of that type. I refer not only to people who invested in the few companies which have been mentioned tonight but also to people who for various reasons have invested in Government stocks which have lost their value. We want to encourage these people.
The Clause is an indication of the importance we attach to that quality of thrift. Britain needs thrift as much as it needs hard work.

Mr. Douglas: I am intrigued by the analysis, if I can dignify it by that term, which the hon. Member for Barry (Mr. Gower) made of the relationship between savings and investment. On coming to the House of Commons I thought that I should not have in this post-Keynesian era to relate the Keynesian view that savings do not necessarily equal investment. Hon. Members opposite apparently still believe that abstinence in the form of savings will eventually become fruitful forms of investment, but this is

not necessarily so. During the previous period of Tory Government the level of gross domestic capital formation was dismally low, as it had been over the previous 20 years.
There is nothing in the Clause to indicate that it will raise the level of investment post-1973–74. I hope that the Chancellor, without necessarily indicating rates of tax, will promise us that, if we should be so unfortunate as to have his Government still in power post-1973–74, he will indicate clearly in the Financial Statement of that year by how much the level of gross domestic capital formation or private fixed investment will increase because of the alterations he proposes to make in the taxation of investment income in that year.
Hon. Members opposite have committed the fallacy of equating opportunities for saving, the value of which we on this side have never denied, with fruitful investment. It does not necessarily follow. The damage which the Government are doing is not necessarily to the production of fruitful opportunities for saving, because saving seems to be increasing, but to the creation of fruitful opportunities for investment. The Financial Statement shows that to mid-1972 the level of private investment will increase by 0·5 per cent.
There is great disagreement amongst hon. Members opposite about what is intended by the Clause. People outside will note with concern the disparity of views about the Clause. All the pressure from the Tory back benches indicates a desire to remove any differentiation between the tax levels on earned and unearned incomes. We would oppose any such total removal. The provision in the Clause is clear and will receive a large measure of support, because it is generally of a simplifying nature.
Earlier the Financial Secretary refused to indicate any level of tax or any level of investment income which will carry the same tax as an equivalent amount of earned income. We should have an indication in the very near future of what levels the Chancellor would exclude.
The argument of Conservative hon. Members seems to be that if we encourage savings which might flow from unearned income they would find their way into investment. That is not necessarily how the matter will be viewed outside.


People who have invested relatively small sums and are receiving relatively small unearned incomes might be in need, and they would be under pressure not to reinvest but to consume. That is why we put down Amendment No. 14, to fix a level of £50. If the argument of Conservative hon. Members is that the object is not to increase disposable income but to accelerate the market mechanism so that people will receive an income flow which will be reinvested, the sum the Chancellor must have in mind will be much higher.
What investigations has the Treasury done of the theoretical possibilities? Those investigations could have included the creation of a model of the propensity to consume investment incomes up to £100 or £200 a year, or of the propensity to consume flows of investment income in excess. If the argument is that people will reinvest a flow of investment income, the level of investment income treated at the same rate of tax as earned income will be fixed fairly high. But it will be very much lower if it is considered to be a consumption possibility in the hands of the individual. The Treasury should have done some sums in anticipation of the implementation of the Clause come 1973–74. Otherwise, the possibilities are that it will be further endangering gross domestic capital formation. Instead of having the effect hon. Members have suggested—without their making any great analysis—of increasing the level of investment, it will have the opposite effect.
The important variable in the whole scheme of things will obviously be the economic climate at the time. Unless the Chancellor does a great deal more than he has done to create fruitful investment opportunities in the United Kingdom, no matter how much he plays about with simplifying the tax system his proposals will not have the desired effect of raising gross domestic capital formation.
One of the disturbing features of the debate is the seeming equation of earned and unearned income in the minds of hon. and right hon. Members opposite. They believe that people receive these income flows from similar endeavours. I do not believe that, and I do not think that the people of this country believe it either. The unearned incomes that Conservative hon. Members talk about have taken years to accumulate and fructify. In con-

stituencies in Scotland and the North of England the opportunities did not exist in the 1920s and the 1930s, and do not exist even today, for people who worked hard by the sweat of their brows to invest and so accumulate sources of capital from which unearned income later flows.
9.30 p.m.
I do not want to misuse this opportunity in the Committee, but I would like to say that a few months ago I buried my father. He worked for 40 years in a ship building yard—when he could. Some of the time he could not. There was no opportunity for him or hundreds of thousands like him to accumulate sources of capital from which unearned income might flow. I do not want to embarrass hon. Members opposite into disclosing how they or their predecessors stored up capital or wealth from which unearned income flows, but the broad mass of people have had little opportunity to accumulate such sources of income.

Mr. Eric S. Heffer: I am sorry to interrupt my hon. Friend, but I want to get this on the record. My father's position was similar to his. My father was a boot repairer who worked hard all his life. He was wounded twice in the First World War and won the Military Medal. When he died, he had one shilling. The money he had earned was spent on keeping his children alive with clothes on their backs and a roof over their heads. He was not able to accumulate one penny. He did not waste his money on drink or anything of that kind. That was the average working man of the period.

Mr. Douglas: I am grateful to my hon. Friend. His intervention substantiates abundantly the example I was giving. There are distinctions. I do not believe that people got the type of investment incomes that hon. Members opposite are thinking about by the sweat of their own brow. They got it largely by a casino society. [Interruption.] Does the hon. Member for South Angus (Mr. Bruce-Gardyne) want to intervene? If he does, I will give way. I am not worried about interventions from him. They do not disturb me.
On the basis of the arguments of hon. Members opposite, they are trying to create a society in which, they believe,


fruitful investment will arise almost solely by the operations on the market. I reject that because previous experience has proved it not to be the case.
We still need to have a society with high levels of public investment, and therefore the Chancellor, on his own analysis and Budget judgment, is doing the country a disservice by trying to persuade it that cuts in taxation are the thing to go for, because cuts in taxation, by the aura he has put on them, mean increases in disposable income. The Conservatives did not win the General Election on the basis of producing higher investment but on two counts in the main—on the issue of cutting into the wage-spiral and on the basis of producing cuts in taxation which would mean to many of the people who supported their increases in disposable income. We do not necessarily want that. We want higher investment, and in so far as this Clause may support that, it will have our backing. But if we are right in our reading of the Clause and if the Chancellor interprets it in the way in which some of his hon. Friends interpret it, it will be a sad day for the country.

Mr. Cant: Does my hon. Friend think that he has pursued this analysis far enough? Obviously, we have the picture of our fathers unable to build up any fortunes, but it may be that there is a case for the argument that these dynamic business tycoons, represented opposite by some of the young organisation men, could in fact, through their efforts in speculating on the Stock Exchange or the foreign exchange market, build up fortunes. Surely the case against this suggestion lies in the inherited fortunes of people who have accumulated wealth. If we make a concession to the tiros opposite in the interests of getting a dynamic economy, we must make a concession to those other people who have inherited wealth, generation after generation.

Mr. Douglas: I am all in favour of making concessions to those who earn their incomes but to follow my hon. Friend into that line of argument would lead me out of order since it would lead me into a discussion of a wealth tax.

Mr. Barber: Those of us who have been present for most of the series of debates on Clause 22 will agree that it has been a very useful series. It will

be generally agreed that this debate has in some respects run rather wide—I do not want to put it higher than that. The hon. Member for East Stirlingshire (Mr. Douglas), said that there seemed to be some difference of opinion as to what the Clause meant, so it might be useful if at the outset I were to state the purpose of the Clause.
It establishes a framework for charging the new unified tax. The rates of tax will be constructed in terms of earned income; a particular band of income will be charged at a rate corresponding to the standard rate less earned income relief, which will be known as a basic rate of tax. Rates above the basic rate will apply to successive slices of income in excess of the basic rate.
It is important to recognise, in view of some of the speeches to which we have listened, that the new rates will apply to earned and investment incomes. In consequence, as is provided for by the Clause, earned income relief will be abolished. There has been a great deal of discussion about the provision for an investment income surcharge. We have had a long debate on this. I want to make it clear that there are two important differences between this system of differentiation between earned and investment income and the present earned income relief system. In the first place, whether the surcharge will be payable will depend only on the taxpayers' investment income and not, as under the old system, on his total income. This is quite different from the current system.
The second point at which these two systems differ is that the present system of earned income relief results in earned income being favourably treated at the lower level of income. The marginal rates of tax are the same for large earned or investment incomes. The surcharge on investment income will work so that at the lower end earned income and investment income will be treated equally. It will be recognised that this is an important point.

Mr. Barnett: The right hon. Gentleman is now saying "at the lower end." Previously we had "a small slice" and we have had the word "modest". He is now talking about the lower end. Will he tell us what this lower end is?

Mr. Barber: I will deal with that point, which was dealt with at considerable length by the Financial Secretary. My hon. Friend the Member for Harrow, East (Mr. Dykes) had some very pertinent observations to make about the way in which investment and earned income had hitherto been treated. He was absolutely right. I have made it clear on this question of the first slice of investment income and how it will be treated that I will not make any commitment at this stage as to how large that first slice will be.
The hon. Member for Heywood and Royton (Mr. Barnett), who has been pressing this point, said that our philosophy was a different one, but he was not sure what our philosophy was on this. Our philosophy is absolutely clear. We on these benches want to keep taxation down, so as to encourage people to work and, of an equal order of importance, to encourage people to save. Therefore, our approach is entirely different from the approach of the hon. Member for Gloucestershire, West (Mr. Loughlin) and some of his colleagues who have been speaking about these matters during the debate.
I agree with what my hon. Friend Member for Ilford, South (Mr. Cooper) said about the vital importance of savings. My hon. Friend the Member for Derbyshire, South-East (Mr. Rost) was correct in what he said about earned income, and he was right to stress that this provision would provide a real incentive to saving. We want to encourage as many families as possible to save, first, because we believe it gives a family security and secondly because it gives independence. I see no reason to apologise for the fact that savings and possessions give the pleasure of ownership. I can see nothing wrong in that. In any event, savings are good for the nation. [Laughter.] It is all very well for hon. Gentlemen to laugh, but look at what happened to saving under the Labour Government. At least we have had a much better record during these past few months. Savings are good for the nation because, with a given level of taxation, the more we save the more we can invest and the faster the growth we can achieve. Conversely, with a given level of investment, the more we can save the more we can reduce taxation and so create a more dynamic society.
The Bill fixes provisionally, in Clause 29, the basic rate of tax at 30 per cent., but it does not specify the width of the band to which the basic rate will apply, nor does it fix the rates of tax or the bands of income on which tax at higher rates than the basic rate will be charged. These matters, as I said in general terms in my Budget speech, will be dealt with in the Finance Bill, 1973, and so will the amount of the surcharge on investment incomes and the level of income above which this surcharge will apply.
The hon. Member for Heywood and Royton was concerned about what he thought to be the likely effect of these changes on the middle income groups. It is impossible to say what the effect will be until the rates and the bands are finally settled, and this cannot be done until 1973. My hon. Friend the Financial Secretary has dealt with this point, but as Chancellor of the Exchequer I think I should add briefly to what he said. I believe that it would be most irresponsible for any Chancellor of the Exchequer to stand at this Box in May, 1971, and give a hostage to fortune about the Budget of April, 1973.

Mr. Sheldon: If the right hon. Gentleman calls it a hostage to fortune to give the provisional rates for the excess at this stage, why does he not consider it to be a hostage to fortune to give the income tax rate of 30 per cent. at this stage for the year 1973–74? Why is one a hostage to fortune and the other not?

Mr. Barber: The hon. Gentleman has anticipated my next point, which had been raised before he raised it by my hon. Friend the Member for Harrow. East, who said that he had hoped that in the Bill we would provisionally fix the higher rates and explained why he hoped this would be done. As I have already said, I envisage a top rate of 75 per cent. for earned income which would be reached at a figure of about £20,000 a year. The higher rates of unified tax and the bands of income over which they will operate will be fixed in the 1973 Budget.
It is true that in the Bill the basic rate of unified tax is provisionally fixed for 1973–74 at 30 per cent., the hon. Gentleman is quite right. This figure is


simply the present standard rate of income tax expressed as its effective equivalent in terms of earned income.
9.45 p.m.
I have made it absolutely clear that this does not imply that this necessarily will be the rate which will ultimately be fixed in 1973. Indeed, since I became Chancellor of the Exchequer, not only have I put forward proposals to alter child allowances and various other taxes, but one of the first things I did was to introduce a Bill into the House to cut the standard rate of income tax by sixpence, which was generally approved, certainly on this side of the Committee.

Mr. Barnett: If the right hon. Gentleman has been able to give information about the 30 per cent. rate and the 75 per cent. top rate, why equally has he not been able to give the steps of progression showing his calculations so that we could see the way in which the sum will work out?

Mr. Barber: Because the 30 per cent. rate at the bottom and the 75 per cent. rate at the top are two rates in an entirely different category. Broadly speaking, they are the rates in existence as a result of the changes I have announced. So far as the other rates are concerned, this is a matter for two years' time. This particular reform does not come into operation until two years hence, in April 1973.
To sum up the benefits involved in this major reform of the personal tax structure, first of all it undoubtedly considerably simplifies the tax structure. Instead of two classes which have to be assessed separately, there will in future be a single tax. The second great advantage is that I very much hope it will lead to a smoother graduation and there is every reason to believe that it will do so. Instead of the present uneven graduation of rates which increase irregularly and steeply, there will be a smooth system under which personal allowances are deducted from total income, a basic rate, which is provisionally fixed at 30 per cent., then applies to the majority of taxpayers, while for the higher incomes successive slices of income above the band covered by the basic rate are changed on a smoothly increasing scale of rates. This must be an advantage.
The third benefit of the new system is that it will provide a significant incentive to earnings because, by restructuring the tax in terms of earned income, the unified tax will secure that the nominal rate of tax on earned income is seen to be the true rate. We have been over this ground before, and I will not elaborate upon it. There may be differences of opinion, but I have met many taxpayers who believe that half their overtime pay is taken in tax when the truth is that even on the present rates, as reduced since we came into office, the figure is 30 per cent.
The fourth benefit from this change is that it will provide a real incentive to savings. The present tax system discriminates violently against investment income, particularly in relation to surtax. To give one example of the present system, the marginal rate of tax on a pure investment income of £4,000 accruing to a single man is no less than 61·25 per cent., compared with 30·14 per cent. on an equivalent earned income. By equating the tax on modest amounts of investment income and earned income, the incentive to personal savings will be materially increased.

Mr. Douglas: Does the right hon. Gentleman concede that, in year one of the implementation of his proposals in 1973–74, the incentive will be to look at the income flow in the hands of the recipient as disposable income? He is saying that the ultimate effect of this proposal will be to increase savings. But the first round of the flow will be looked at as disposable income. Therefore, he has to condition the environment after that.

Mr. Barber: No. I hope that I am conditioning the environment now. People can be assured that, as from April, 1973, modest amounts of investment income will treated in the same way as earned income. That is becoming more and more widely known, thanks to debates such as this, and it will provide a real incentive to savings.
The fourth advantage is one which I think was admitted by the hon. Member for Heywood and Royton—

Mr. Barnett: When the right hon. Gentleman uses the word "modest", presumably he has some figure in mind. It must mean something to him. Can he give us an idea whether it is £50 or £4,000? Surely he is entitled to give us


some idea. "Modest" means a figure to him. It probably means something different to us. Can he give us some idea of his thoughts on the matter?

Mr. Barber: For the reasons that I have mentioned, I have no intention in any circumstances of giving a figure for the Budget of April, 1973. The only hint that I will give to the Committee on what may be in my mind is that my hon. Friend the Financial Secretary rightly advised the Committee to reject the Amendment in the name of the right hon. Member for Birmingham, Stechford (Mr. Roy Jenkins) and his hon. Friends.

Mr. Loughlin: The right hon. Gentleman said that he was not inclined to give figures. However, if I understood him correctly, he gave a figure of £4,000 of unearned income as being "modest". I think that he gave the figure two or three minutes ago. Can the right hon. Gentleman confirm or deny that?

Mr. Barber: Yes. I deny it. That is not the point that I was making.
I turn to the fourth advantage, which is accepted certainly by the Front Bench opposite. It is the fact that this will lead to a considerable simplification of administration. At present, any surtax payer has to deal with at least two Inland Revenue offices. He has to deal with the Tax Office for his income tax affairs and with the Surtax Office at Hinchley Wood in connection with his surtax. The unified income tax will be handled in Tax Offices entirely. This will be not only a convenience for tax payers but, in due course, will save a considerable number of Inland Revenue staff.
A further simplification from both the tax payer's and the Revenue's viewpoint concerns P.A.Y.E. At present, this applies only to income tax. Under the unified income tax, P.A.Y.E. deductions will extend all the way up the tax scales; so that the entire year's tax liability of an individual having only income within P.A.Y.E. will be made by deductions from pay during the year.
There was one point which was raised by the hon. Member for Llanelly (Mr. Denzil Davies) to which I was asked specifically to reply. It concerned the word "individual" in Clause 22. I was asked whether this word, used in this context, included trusts and settlements.

The answer is that it does not comprise trusts and settlements. I am aware of the point which was put by the hon. Gentleman but, in practice, the significance of charging the undistributed income of accumulation settlements to the basic rate tax only will depend on the rate of surcharge and the level at which eventually its starting point is fixed. Decisions on these matters will not be taken until 1973. I think that the hon. Gentleman will agree that until the tax structure has been crystallised by decisions about surcharge we shall not know whether any special action is needed on income accumulated under settlements.

Mr. Barnett: I understood the right hon. Gentleman to be arguing that the investment surcharge might still apply to trusts. Surely the Clause as now drafted would not apply.

Mr. Barber: The word "individual" in subsection (1) does not cover trusts and settlements. That is the answer to the basic question posed by the hon. Gentleman's hon. Friend. I was aware of the point which his hon. Friend raised, but, as I said, in practice the significance of charging the undistributed income of accumulation settlements to the basic rate of tax will depend on the rate of the surcharge and the level at which its starting point is eventually fixed.
The final question put to me by the hon. Member for Heywood and Royton concerned the savings of staff. The net saving, when unified tax is in full operation, will be about 1,200 staff.

Mr. Cant: Before the right hon. Gentleman sits down may I ask about another very important point mentioned by my hon. Friend, namely, the effect on charities of changes in taxation? It is obvious from articles and correspondence in The Times and the Financial Times that there is a great deal of confusion about this matter. The authorities are in conflict. If the income of charities is to be substantially reduced because of changes in taxation, we would like the right hon. Gentleman to tell us something about that now.

Mr. Barber: That point, which is very important, always occurs when the standard rate of tax is changed. Whenever the standard or basic rate of tax is


changed, it has the consequences which the hon. Gentleman has in mind. I have no doubt that this matter will be discussed upstairs. It raises very much wider questions than would be appropriate for me to answer on the Clause stand part. This is a point which has occurred before whenever the standard rate of income tax has been changed.

Question put and agreed to.

Clause 22 ordered to stand part of the Bill.

[SIR ROBERT GRANT-FERRIS in the Chair]

Clause 30

APPLICATION OF NEW SYSTEM

Question proposed, That the Clause stand part of the Bill.

10.0 p.m.

Mr. Maurice Macmillan: I trust that I shall be in order in addressing my opening remarks exclusively to the contents of the Clause.
The Clause introduces the new system of capital allowances on plant and machinery. With two exceptions, the new system applies to all capital expenditure under these heads which is incurred on or after 27th October, 1970. The exceptions are expenditure on secondhand plant and machinery and under hire-purchase contracts. I shall have something to say about those exceptions later.
The starting date is provided in subsection (1). That provides for the new system to apply to capital expenditure incurred on or after 27th October. This matches precisely Clause 1 of the Investment and Building Grants Bill which precludes the payment of investment grants on expenditure incurred on or after 27th October last, unless it is incurred under a contract entered into earlier.
As a corollary, subsection (1) also excludes from the old code of allowances expenditure on plant and machinery which qualifies for the new.
The first of the two exceptions is second-hand plant and machinery. Subsection (2) makes the exception for second-hand assets: this is dictated by cost. In fact, the subsection does not disqualify all expenditure on second-hand assets from the new allowances. For

example, a trader who, in an arms-length transaction, buys, after 27th October, a machine which was originally bought new before that date will get the new allowance on it.
The subsection is necessary because, apart from the accelerated depreciation offered by the first-year allowances in the new system, the new standard rate writing-down allowance is more favourable to industry than the combination of the three rates of the old system. The average rate of writing-down allowance under the old system was under 17 per cent.; the new standard rate is 25 per cent.
So, if the dealings in second-hand machinery were not prevented, it would be to a firm's interest to engage in an artificial transaction—say, selling all its existing machinery to another company under the same control, simply for the sake of the increased writing-down allowances which the latter would get. Since the written-down value of plant and machinery for tax purposes in the United Kingdom is estimated at £6,500 million, the cost to the Exchequer could be very great.
The remedy for this difficulty, which was set out in the White Paper, is that plant and machinery bought second-hand from a connected person will get the old rates of allowance unless it was originally bought new after 27 October. The same will happen in transactions between unconnected persons if the sole or main benefit of a transaction is to get the new allowances.

Mr. Dalyell: There is some difficulty about the definition of connected and unconnected persons.

Mr. Macmillan: Broadly speaking, individuals are connected if they are closely related directly or by marriage to each other. Companies are connected if they are under common control. This is an important factor. These concepts are a familiar and established part of the taxation code already, and the problem of definition is less difficult than it may appear.
The second exception is hire-purchase transactions which straddle the transfer date of 27th October, 1970. These are covered in subsection (3), which provides that, where plant or machinery is bought


on hire purchase, if any capital expenditure has been incurred before 27th October and the asset is already in use, none of the expenditure under the contract will qualify for the new allowances. All of it will get allowances under the old system. This is because the treatment of hire-purchase contracts under the new system is different from their treatment under the old.
The main different is that, under the old system, initial allowances were given on the capital element of each instalment as it was incurred, but writing-down allowances related to the whole capital cost and started from the time that an asset was brought into use, so that, in the second and later years of the hire-purchase period, initial and writing-down allowances were both being given and the amount of the allowances interacted in a complicated way.
But, under the new system, the first-year allowance is intended to replace the initial allowance and the first-year writing-down allowance together on the asset: it must, therefore, be a rule of the new system that the first-year and the new writing-down allowance cannot both be given for the same year in respect of the same expenditure. I hope that that is reasonably clear to the Committee. It is a logical way of handling hire-purchase transactions which straddle the changeover date of 27th October, 1970.
This opportunity has been taken to somewhat simplify the treatment of hire-purchase expenditure by treating it under the new system as being wholly incurred when the asset is brought into use. For determining whether it falls under the old or new system, one need only see when it occurred, and if the expenditure was incurred before 27th October and the asset is then in use, the old system applies, otherwise the new system applies.
The question of expenditure incurred in anticipation of trading is a relatively minor point about the starting-date rules for the new system, and this is covered in a later Clause. However, it may be for the convenience of the Committee if I deal with it now. It reproduces the long-standing rule in the capital allowance system that capital expenditure incurred by a person about to carry on a trade has to be treated as though it were incurred on the first day of trading, otherwise

it would not qualify for allowance. This is obvious if one considers the matter.
Hitherto, this rule has not applied for the purpose of deciding what rate of allowance should be given—that is, if the rate has been changed in the interval, when the expenditure has attracted the going rate for the time when it was incurred—but in this case, because we are reforming the whole system of allowances, it would be perverse if expenditure which comes within the system for the first time after 27th October were to have the old arrangements applied to it simply because of the change in the rates of allowance.
The rule as set out in Clause 40(4) has been made to apply so that expenditure incurred on, for example, 1st September, 1970 in preparation for trading which started on, say, 1st November, 1970 will get the new allowances. In case there is some doubt as to what all this means, perhaps I should add that this is all to the advantage of taxpayers.
This is a simple Clause which introduces the new system of capital allowances and sets out the starting dates and the two exemptions I have mentioned. Later we shall come to some of the more detailed considerations applying to this matter, in subsequent Clauses in this Part of the Bill. Meanwhile, I commend the Clause to the Committee.

Mr. Edmund Dell: The last time I spoke in Committee on a Finance Bill was in 1965, when, among other points, I was arguing in favour of having an effective investment incentive system. I find myself now arguing against the introduction of an ineffective investment incentive system.
Before I comment on that score, I will put a number of detailed questions to the Chief Secretary. I have grouped them together at the outset of my remarks so that he may have an opportunity to consider the questions and, if necessary, to take advice so that he can answer them.
What will be the result of the introduction of this new system on the provision of information about the operation of these investment incentives? The hon. Gentleman will know that under the investment grant system a great deal of information was made available and


published annually. I asked the Chancellor of the Exchequer whether similar information would be available in respect of this system, and he replied that it would not be worth the cost of producing it. I then raised the matter in the House last November and I was given a more hopeful answer from the Financial Secretary, who told me:
We shall certainly consider the right hon. Gentleman's suggestion as to how far we should go in producing further statistics on investment allowances. I hope that he will take that as sincerely intended."—[OFFICIAL REPORT, 17th November, 1970 Vol. 806, c. 1112–3.]
Of course I took it as sincerely intended. I have been waiting ever since for some indication of what can be done. I wrote to the Financial Secretary a short time ago but I have not yet received an answer. What can the hon. Gentleman tell us tonight about the information available? After all, the information is of importance in assessing the efficacy of this system, as it would have been for the last system.
Secondly, why are the Government discriminating against services in development areas? I thought that it was a great principle of the Government not to discriminate against them. If the reason is that services are likely to grow in development areas with the developing economy in those areas generally, the hon. Gentleman has gone a long way to admit the point of our discrimination in that respect against services. That obviously will not be his answer. I should be glad if he would give us his answer.
My next question is whether the Government seriously regard a 60 per cent. tax allowance as an investment incentive. They included this in their White Paper on investment incentives, but surely they cannot be serious in so regarding it. There has been much discussion during this Finance Bill about what gives rise to investment, and reference has been made to the influence of profitable demand, to the expectation of sales, and to the need to maintain a share of the market. A series of such influences on investment has been argued in the House, all of them quite clearly far more powerful than a 60 per cent. tax allowance. Do the Government regard this as an invest-

ment incentive? If they do not—I do not think that they seriously can—why do they not just cut company taxation a little more and get rid of the distortion which investment incentives produce in the economy by their tendency to assist capital intensive investment specifically?
I should like to know the Government's view of the contrast which has developed between the situation of investment incentives in this country and that in the European Economic Community. As is known, countries of the E.E.C., in their equivalents of development areas particularly, are increasingly using a grant system. It is understood that the European Commission, if it has to have an investment incentive system, prefers a grant system to a tax allowance system which, it says, is uncertain in its effects. What account of the situation was taken by the Government in deciding to introduce tax allowances in this country?
It is not just a matter of whether we enter the E.E.C., but a matter of the contrast and competition which will exist between this country and European countries in any case. After all, they have the greatest investment incentive of all, that is, a very much more rapidly growing economy. In addition to that great incentive, they are introducing a grant system. What estimate have the Government made of the effect on investment in British industry, on the competitiveness of our industry as against European industry, which will follow from their decision to introduce tax allowances here when grants are being increasingly used in Europe?
My last question, the hon. Gentleman will be pleased to hear, is one which I am sure will be of importance in future, and it is on a subject which may interest the Public Accounts Committee in the future more than it has in the past in considering tax allowances or the investment allowances which used to exist. It is known that under the investment grant system various abuses were detected which had to be corrected. But certain of these abuses can arise equally under the tax allowance system. For example, there was the abuse of buying a machine in a development area and moving it out, yet claiming the higher rate of grant. That is an abuse which is equally possible under this system.
10.15 p.m.
There was the abuse of people buying ships abroad, without any benefit accruing to the British balance of payments, and getting grants for them. That abuse was dealt with, at any rate in part, by the Industrial Development (Ships) Act passed in the last Session of the previous Parliament.
I believe that a similar problem can arise under this system, admittedly to a slightly less serious degree, because one can only set off a tax allowance against profits. A similar problem might arise of allowances being allowed in cases where ships were being bought and operated in a way which was not beneficial, indeed which might be harmful, to the British balance of payments.
What are the Government doing in this system to prevent that from happening? There is nothing in the Bill to assist me to answer that question.

Mr. Bruce-Gardyne: Was not the greatest abuse of all under the investment grant system the position whereby a company could make a proposal for an investment grant without there being the remotest chance of the investment having a viable future and the Ministry of Technology, as it then was, having no choice: the Ministry was under a direct obligation to make grant if the investment qualified? The right hon. Gentleman must know, as I do, of cases in which the most unviable investments were proposed and obtained grants. This at least is an abuse which is abolished by this system, which is profit-related.

Mr. Dell: The hon. Gentleman obviously has cases in mind and I will leave him to list them. I will come to that argument, because I had it in mind to make some reference to it.
The tax allowance system has been introduced because the Conservative Party was of the opinion immediately the grant system was introduced that it was a bad system, and the Conservatives opposed that system from the beginning.
The system of investment grants is not bad in Europe. Evidently it is not bad in the eyes of the European Commission, if there is to be an investment incentive system. It is not bad in Northern Ireland, although hon. Members from

Northern Ireland voted against the investment grant system when we debated it recently, presumably on the basis that the greater the advantages Northern Ireland can have compared with the rest of the United Kingdom, the better.
The system of investment grants certainly would not be bad in Scotland, Wales, northern England and Merseyside, if these development areas had in this respect the good fortune to have their own governments. Any Government of a development area which had any sense would introduce an investment grant system to encourage investment. Northern Ireland has done it, just as it is being done in Europe.
Despite all this, an investment grant system is apparently bad in Great Britain. It is good everywhere else but bad in Great Britain. Everywhere else, apparently, an investment grant system produces good quality investment, otherwise it would not be used, but in Great Britain it will produce bad quality investment.
Here we come to the subtle change in argument of which the hon. Member for South Angus has given us an example. When we discussed the decision to abolish the investment grant system when the announcement was made last October, we were told that the system was being abolished because it had not been effective. The system was supposed to be ineffective; it had not had the expected effect on the level of investment. Now we see, after 11 months of Conservative Government, after all the steps which have been taken by the Chancellor of the Exchequer to reflate the economy, a fall in investment intentions.
If ever there were an indication of how effective the investment grants system was, it is the fact that now we are having a fall in the level of investment intentions, despite the fact that the Chancellor has been able to take his budgetary measures whereas when my right hon. Friend the Member for Birmingham, Stechford (Mr. Roy Jenkins) was having to control home demand to transfer resources into the balance of payments, with the help of an investment grant system, we succeeded in maintaining investment in Britain. Therefore, the argument has changed. It is no longer that the system was ineffective, but that it was too effective, that it produced


results that were too capital-intensive, and perhaps even destroyed jobs in the process, that it produced too much investment, some of it of doubtful value.

Mr. Bruce-Gardyne: What did Jeremy Bray say?

Mr. Dell: My friend Jeremy Bray never argued that the investment incentive system was ineffective. He said that it was too effective on behalf of capital-intensive industries. I happen to disagree. These are the arguments the Government are now producing, because they can no longer maintain the argument that the investment grant system was ineffective. They are no better than the old arguments.
As to capital intensiveness, if the tax allowance system has any influence, it is on capital-intensive industries, particularly in development areas, where free depreciation is granted. Surely, the object of that type of incentive is to assist capital-intensive industries? The C.B.I., arguing in favour of investment incentives, instead of a cut in company taxation, which is presumably the alternative, stated that the object of investment incentives is to encourage capital-intensive investment. Capital-intensive industry is more mobile, and consequently is more easily moved to development areas. But whereas we, while having a system with the effect of encouraging capital-intensive industries, also had regional employment premium, the Government are abolishing it and so doing away with its effect as a labour subsidy in encouraging different sorts of investment.
There is also the argument that the system produces too much investment, some of which is of doubtful value. That does not appear to be the attitude of the Chemical Industries Association, which said in its recent report that there has been a serious fall in the level of chemical industry investment in this country, partly as a result of the withdrawal of investment grants.
The shipping industry was expanded as a result of investment grants. The Chamber of Shipping has made perfectly clear how beneficial the investment grant system has been to that industry and how serious has been the effect of the Government's breach of promise in having no transitional arrangements in introducing

their system. Paragraph 10 of its brief, which the Chamber has no doubt sent to other hon. Members, says:
The Government's Election Manifesto in referring to substitution of tax allowances for grants said: 'These changes will be subject to transitional arrangements and will not in any way be retrospective. Special assistance for particular industries like shipping will be continued'. The Chamber's argument is that the change is retrospective to the extent of some £8 millions worth of investment grant.
The Chamber is accusing the Government of a gross breach of faith in breaching their election manifesto by not having any transitional arrangements and denying the shipping industry £8 million worth of investment grants.
It is not the investment grant system but the tax allowance system that is the bad system, as is increasingly realised, for example, in Europe.
May I point out that the Under-Secretary of State for Trade and Industry (Mr. Anthony Grant) is fond of saying that even in the development areas, where free depreciation is granted, the effect will at best be marginal, that the main influence on those areas, as on the rest of the country, is the general level of economic activity. One of the troubles with the system is that its influence is so marginal as to be barely detectable, even in development areas, to whose problems I will come shortly.
On 12th May, the hon. Member for the Cities of London and Westminster (Mr. Tugendhat) said:
The real difficulty for a country such as ours, which has had such a poor growth record over many years, is to set the virtuous circle going."—[OFFICIAL REPORT. 12th May, 1971; Vol. 817, c. 432.]
He meant by "virtuous circle" high growth producing high investment. I entirely agree with him that that is the problem. I believe that investment grants, the introduction of an effective system of investment incentives plus expanding demand such as we would have been having now, if the Labour Government had been returned, could have helped us into that virtuous circle. Tax allowances are having little effect on investment intentions, as a Financial Times survey recently showed.
Hon. Members opposite have repeated many times how the proportion of national income constituted by profits has fallen over the years. Yet precisely at


this moment the Government introduce a system whose influence, if any, depends on the level of profits. The effect has been disastrous on the level of investment—for example, in the machine tool industry—just at the moment at which they have introduced the system. Surely it could have been forecast, whatever the merits or otherwise of an investment incentive system of this type, that its introduction at this moment must have a deleterious effect on the level of investment. There was no other possibility if investment incentive systems have any influence at all. One can only suppose that the Government intended the results which have taken place.
Another reason why the tax allowance system is thoroughly bad is that it is a device which weakens competition—and I suspect that this is one of the reasons why the European Commission does not think much of it. It weakens the weak and strengthens the strong. It weakens new firms in their battles with established firms. A policy of competition should aim not to discriminate against the weak in their battle with the strong. If it does, it weakens competitive forces. It has weakened certain industries in their international competitive battle—for example, shipbuilding, which faces subsidised competition throughout the world and is now deprived not merely of the sort of assistance given as a result of the Geddes Report, but even of investment incentives also, because the industry has a low level of profitability.
The shipbuilding industry in Great Britain has been weakened in competition with Harland & Wolff, which had the advantage of investment grants in Northern Ireland. It weakens the shipping industry in international competition. The Rochdale Report argued against investment grants for the shipping industry, but it said that an adequate and equivalent level of support should be granted. In fact, a reduced level of support for the shipping industry has been granted and this is weakening it in its international competitive efforts.
But the main reason why tax allowances are a thoroughly bad system is that they are disastrously inadequate in development areas. Indeed, the reduction in the number of inquiries regarding development in development areas and

the increase in unemployment in those areas is a major responsibility of this change. The Secretary of State for Trade and Industry made a personal statement to the House on 10th May. He informed us that he had made, in good faith—and we accept that—a mis-statement to the House about the number of inquiries by industrialists about investment in the assisted areas. He originally gave the figure of 538, which was not correct. He said that the correct figure for the number of enquiries by industrialists during the first quarter of 1970 was, in fact, 2,400, and that the number had declined to 1,083 during the first quarter of 1971 rather than increased as he had originally suggested. That decline is, I believe, to a substantial degree a result of the abolition of investment grants and the introduction of this system.
10.30 p.m.
To a certain extent the Government were forced to face up to the fact because hardly had they introduced the tax allowance system than they had to engage in the mass creation of special development areas, far more widely than had been done by the previous Government. They even had the cheek to take credit for this although the level of assistance to development areas, even with special development area status, is much lower than it was in ordinary development areas under the previous system.
Curiously enough, the form of assistance given to development areas which have this privilege of being created special development areas is grants, not allowances. Even this Government occasionally have to face facts and to realise that the effective way of dealing with the problem of employment and the creation of employment in development areas is by grants. Even they have had to admit that the changeover and the way they made it in October, 1970, was a mistake. They had to introduce the supplementary assistance shortly afterwards.
They claimed in doing this that the differential was maintained, that is the differential between the assistance given in development areas and assistance given in the rest of the country. I have previously argued that the claim that the differential was maintained was misleading and meaningless. It is misleading


because it is a statement about the cash flow to firms which may have investments in development areas, but which may use the money to invest anywhere in the country. It is a statement about investment grants paid to firms in respect of investments made before 27th October, 1970. It is completely meaningless as it providse no measure of the current incentives in development areas.
I question even the statement that the differential has not been reduced. I think it has been. It is not only the differential that matters. What also matters in development areas is the total level of assistance. I asked the Government what, under the new system, will be the total level of assistance. They have been unable to give a reply. I wrote a letter to Treasury Ministers asking for the total level of assistance which will go to the development areas under the new system. I received a reply from the Minister of State, Treasury who said that he could not give me the information.
I may say that when Ministers are dealing with particular areas they say that the level of assistance is being maintained. When they talk about Northern England they say that the level of assistance is being maintained and when the Secretary of State for Scotland talks about Scotland he says the same thing. Yet when we ask the Government for figures to show that the level of assistance is being maintained they are unable to give any. The Minister of State said that he had two reasons for not giving me this information. He said:
First, it is impracticable to give a total figure for the benefit to the development areas under the new system.
However that does not prevent the Secretary of State for Scotland from making a statement about Scotland, although to make such a statement is "impracticable".

Mr. Dalyell: Is it not a fact that the level of assistance has greatly fallen and that is why we hear tonight that Plessey's at Alexandria is closing, making 400 men unemployed and shutting a modern machine shop?

Mr. Dell: Of course the level of assistance is falling and when Ministers talk about the level of assistance being maintained they are totally wrong and these claims should not be made. The authority for that statement is what the

Treasury has told me—that it is "impracticable". Ministers who come to the House and make statements of this sort, in face of which the Treasury says in this letter to me, are grossly misleading the House. The Minister of State gave a second reason for his inability to tell me the level of assistance to development areas under the new system:
Secondly, discussion of incentives in the context of regional policy normally centres on the value of the differential arrangements. The extent to which the development areas get benefits which are not available elsewhere is the only meaningful basis for measuring the aid which is given to them.
That statement is nonsense. The level of aid, as well as the differential, is important. What we discovered in regional development is that, unless there is a sufficient scale of inducement to industry—not just a differential—we will not get firms to go to the trouble of expanding and going into development districts to achieve their expansion. I will repeat that from its original source. It was said by the right hon. Member for Bexley (Mr. Heath):
What we discovered in regional development is that unless there is a sufficient scale of inducement to industry, not just a differential, we will not get firms to go to the trouble of expanding and going into the development districts to achieve their expansion."—[OFFICIAL REPORT, 10th May, 1965; Vol. 712, c. 76.]
The Minister of State and current Treasury policy are in direct contradiction to what the right hon. Member for Bexley was saying from this side of the House when he in his turn, during the debates on the 1965 Finance Bill, was arguing in favour of an effective investment incentive system for the benefit of the development areas. He said that what was important was the level; not just the differential. We said—and we acted on it—that what was important was the level and not just the differential. The Government today are saying that what is important is simply the differential, but they have not even maintained the differential. Surely the Prime Minister does not change his mind simply because he won an election and finds it necessary to use this method to cut public expenditure.
There is one way in which he could make up the level of assistance. It is the way used by the right hon. Member for Barnet (Mr. Maudling) when he was Chancellor of the Exchequer. He could


add on investment grants to the system of free depreciation which he introduced. At 5 per cent. or 10 per cent. that would cost £32 million or £64 million. That would help to reintroduce an effective system of incentive for development areas.
In discussing this Clause we are trying to recall to the Prime Minister the views which he expressed on that occasion, and

to persuade the Government that, if assistance to development areas is to be effective, they must supplement free depreciation far more realistically than they have done. If the Government want investment in this country to increase, as is necessary, they must have an effective system of investment incentives and not this completely worthless system which they have introduced.

Mr. Tugendhat: I apologise to the House, because I realise the hour is late, but I have only one brief point to make. I support the Clause but I would ask the Chief Secretary and the Department of Trade and Industry to think again about the position of companies in connection with the cut-off on 27th October.
A number of companies which were induced to go into development areas by the last Government have now found that they have suffered grievous financial loss. I have one in my constituency which fears for its future. These companies have been misled to the extent that they went in under one set of circumstances and now find themselves operating under another. If it were possible to reconsider the transitional arrangements which will cover their position, this would make a great deal of difference to a number of very small but important companies.

Mr. John Horam: The basic principle behind this change on investment allowances is that they should be profit-related. That simply means that a company obtains only the maximum amount of aid available if it is making good or reasonable profits. In my view that is wrong. It will mean that investment is not undertaken which, in the light of a full consideration, might be considered to be wasteful. It equally means that some investment which will be extremely useful, and indeed significantly important to a strong British competitive position and to a full rate of economic growth, will not now take place. That will be the case if the company making the investment is not necessarily a particularly high performer and does not expect to make a great deal of profit from the investment project it has undertaken.
Rather than theorise about the matter, since a great deal of intellectual and ideological to-ing and fro-ing has taken place, I want to quote two or three hard industrial examples. The first is the textile industry, which is not by any stroke of the imagination a high profit industry, and in particular that area of the textile industry in Lancashire and Yorkshire.
In the textile industry there are a large number of small family companies operating old machinery in old plants. They

cannot make very much profit and in fact do not do so, but they carry on in business because they depreciated their machinery years ago and can churn out standard stuff at a relatively low price. The net result is that they retard the progress of the more progressive companies which, inevitably, are forced to compete on price. They maintain in existence old and out-of-date workshops which are bad places for people to work in. Thirdly, they harm our export performance because they have not the money to put out a modern marketing effort. Governments of all descriptions have tried to do something about the situation in the textile industry. There have been a long series of efforts, both by Government on the one hand and by private companies on the other, to buy these companies out of existence. The net result of this situation is that the industry is forced into a low-profit situation.
A third effort was tried to remedy the situation. Courtaulds came along and using the investment grant system of the Labour Government and the grants available in the development areas set up modern machinery, worked it round the clock, and were therefore able to produce a situation which clears out some of these old redundant companies. This would not have been possible but for the existence of the investment grant system, and will not be possible once the grant system disappears. This is an example of how in a low-profit industry it is important to get some investment into an industry to improve our total competitive situation.
Let me take another example, the high technology industry. It has been proved again and again that the fastest growing areas in industry are often precisely those which have a high degree of technical concentration. A "Little Neddy" report showed that one of the reasons that Britain's export performance has been poor is that we are poorly represented in these particular areas of technological sophistication. Obviously it follows that a high degree of new technology can come only from a high level of investment; yet it is precisely these industries which have very considerable profit problems. We have seen this in the spectacular example of Rolls-Royce. Does it make sense, therefore,


to relate investment aid exclusively to profits? Clearly in this case, which is an extremely important one, it is the reverse of what is sensible.
10.45 p.m.
My third example is that of the foreign company investing in this country. This sort of investment is extremely important to us. If we go into the Common Market, it will become even more important. It is particularly important in development areas. Roughly one-third of the total new investment going into the development areas has come from foreign companies. Very often, they have little or no taxable income in this country. Therefore, they will not have the same incentive to invest here as they had under the old system. That is one of the reasons why Northern Ireland chose to stick with the old system, despite the fact that hon. Members opposite representing Northern Ireland constituencies voted for the abolition of the investment grant system in this country.
Those examples show that the exclusive pursuit of the god of profit does not necessarily maximise growth. To do this, account has to be taken of far wider strategic and planning considerations. Apparently, this proposition is not recognised by the Government, but, curiously enough, it is recognised by industry. To illustrate that, perhaps I might read some remarks of the hon. Member for Cities of London and Westminster (Mr. Tugendhat), to whose veracity and honesty I can testify, since he is my "pair".
Speaking on our second day's consideration of the Bill, the hon. Gentleman said:
I find myself in some disagreement with those hon. Members, some on this side and some opposite, who have suggested that the most important reason why companies invest is the prospect of earning profits. For the very large companies"—
this is the important point—
numerous surveys conducted on the subject show that the most important single reason out of many is the prospect of increasing sales, the prospect of increasing market share, and the desire to hold market share.
I agree. So did the Chief Secretary. Replying to the debate, he said:
My hon. Friend the Member for the Cities of London and Westminster … pointed out,

reasonably, that in larger companies the seeking of profit was probably a secondary motive to the seeking of a larger share of the market in order to widen their capacity to sell and increase the opportunity for increasing turnover."—[OFICIAL REPORT, 12th May, 1971; Vol. 817, c. 432 and 450.]
That is precisely the point. It is even more important when one considers how essential to economic growth are these large international corporations.
Having referred to my "pair", I might perhaps tell hon. Members that he is bringing out a book on the subject. I hope that it will ram home the point even more.
In order to maximise growth, it is wrong exclusively to go for maximised profits. Wider considerations have to be introduced. Only the Government can introduce those wider considerations. The whole paraphernalia of aid introduced by the last Administration, the Industrial Reorganisation Corporation, the creation of the Ministry of Technology, in addition to investment grants, was the result of this central perception.
It is curious to reflect that it is now the Labour Party which is the party of big business, in the sense that it does not exactly get subscriptions from big business and we do not share its philosophies. But the Labour Party appears to understand the needs of big business far more than the party opposite, which, by contrast, seems to be typically concerned with the condition of the small company. This is not surprising, because the small company was typical of the type of company in the nineteenth century from which flow some of their economic ideas. But the world has changed. It is now the I.B.M.s and the General Motors of this world which count. Until the Government recognise that, we shall head in the wrong direction.

Mr. Dalyell: I should like to echo briefly the question put by my right hon. Friend the Member for Birkenhead (Mr. Dell), which was extremely important to the development areas; namely, whether the Clause does not amount to some kind of bias against the service industries in the development areas. I hope that this question will be answered.
There is a matter of even greater moment. I do not apologise for beating the local development area drum. A problem of considerable seriousness has


hit Scotland tonight: the announcement of the closure of the Plessey works at Alexandria. I can speak a good deal more freely on this matter, because it does not affect any of my constituents and, therefore, I might be thought to be more objective about it.
Without launching into any attack before all the facts are known, I think that it might be interesting to have some kind of study as to why this decision was made and whether it was in any way related to the development area and, indeed, the financial policy about which we are talking.
There is wide feeling in the electronics industry at the moment that the taking away of investment grants is a serious blow to a nascent industry. Part of my business, as hon. Members know, working for the New Scientist, is to go round this industry and talk to the people engaged in it.
Rifht hon. and hon. Gentleman opposite do not need me to tell them about the situation in which the electronics industry finds itself. Only 18 months ago, under the Labour Government, serious commentators could with some truth describe the central belt of Scotland as a second California. The situation today is very different. It is certainly no laughing matter for the Under-Secretary of State for Trade and Industry, because his Department will have to explain to large numbers of young people, who are trained but unemployed for the first time, how their policies have helped to bring that situation about.
I hope that in the examination which will undoubtedly take place regarding the closure of this factory and other developments within this group there will be an honest look at the extent to which Government policies have contributed to these unhappy events.
In a situation where 8, 9, 10 and 10-plus per cent. of the working population are unemployed, it is time to ask questions. The Under-Secretary of State for Development, Scottish Office, has just come into the Chamber. I should tell him that the subject about which I am talking is the closure of the Plessey factory at Alexandria and the extent to which it can be directly attributed to the policies of the Government. I realise that it is premature, but I should welcome any comment which can be made

about this matter. I ask the Scottish Office, the Department of Trade and Industry and the Treasury to have a frank examination of how it is that closures in development areas are taking place at an unprecedented rate—it never happened before—and to what extent these can be attributed to Government policy.
I have always taken the view that politicians would do themselves great credit if from time to time they admitted that they were wrong. I should like a frank admission from the Government that perhaps they made a mistake—we can all make mistakes—in their policy on investment grants and that it ought not to apply to certain areas—for example, Gateshead, the North of England and areas in the West of England. I do not put this simply in terms of Scotland.
This is a great blow to our growing electronics industry at this stage in its development. I have never asked, nor have my hon. Friends, for help for all time. All we are saying is that at this stage, in the circumstances, when a modern company engaged in a modern industry is driven to close a modern works, we must think pretty hard. I hope that the Secretary of State for Scotland in the Cabinet and all those with responsibility in the Cabinet and in the Public Expenditure Sub-Committee of the Cabinet will argue this point. My hon. Friends and I will neither laugh nor jeer if the Government have the courage to change their mind on these matters.

Mr. Maurice Macmillan: As the hon. Member for West Lothian (Mr. Dalyell) suggested, it is perhaps a little premature for me to give any detailed explanation of the closure of Plessey's, but in case he thinks that it is relevant, I have been informed that the firm's judgment of the reasons is that it was exclusively due to cost inflation.
My hon. Friend the Member for the Cities of London and Westminster (Mr. Tugendhat) raised a point which I can answer only in a negative way. Perhaps he would transfer his attention to the Committee stage of the Investment and Building Grants Bill, which begins tomorrow.
The whole of this debate has been repetitive. The change from investment grants to tax allowances was debated in


October when the Chancellor announced it, on Second Reading of the Investment and Building Grants Bill on 5th May, on the Budget, on the Finance Bill and on a good many Adjournment Motions. So I do not propose to go over the arguments in detail. But the attacks of the Labour Party on the effectiveness of these allowances in dealing with unemployment and comparing it with the effectiveness of investment grants is almost impertinent, considering that unemployment nearly doubled during their period of office and that four years of stagnation led investment grants to be described so clearly by Dr. Bray as not working.
We are changing it now to encourage profitable investment, which is the only way of getting industry going again successfully. What hon. Members opposite were demanding was not so much investment incentives as straightforward subsidies to enable industries which were either incompetent or insufficiently able to attract investment—either equity or loan—to carry on.
There is a case for Government aid to some forms of high technology, as we have seen in the system of launching aid for aircraft. But no one would suggest that this is an argument for such aid for all forms of investment in the industrial spectrum. The previous Government committed large sums to what in effect were substitutes for both capital and labour. The right hon. Member for Birkenhead (Mr. Dell) said that we should make up our minds whether these were too effective or ineffective. The answer is that they did not achieve results commensurate with the expenditure on them, and this is particularly true of the high rate of investment grants in development areas, which did not seem to us to bring the effect on employment which they:,et out to do.
11.0 p.m.
The new mixture of measures, with their greater emphasis on allowances related to profitability, and assistance under the Local Employment Acts, related to job creation, will give better value for money. Apart from the change from investment grants to capital allowances, we have introduced important measures to help the regions, including building grants, operational grants and additional assistance area coverage. This very much

reinforces what my right hon. Friend the Prime Minister has been quoted as saying about the effective range and scope of allowances being directed to the development areas.
The arguments about investment grants versus capital allowances have been adduced frequently enough. They were set out in the first three paragraphs of Cmnd. 4516. The first factor against investment grants was their high cost in relation to their effectiveness. The grants went to firms whether or not they were effective and making a profit, and that could lead, and, in fact, led, to uneconomic investment and a waste of resources. There was also discrimination against service industries.
This brings me to the questions asked by the right hon. Member for Birkenhead, who began by taking the astonishing course of accusing our new arrangements of discriminating against service industries. These new tax allowances remove the distinction which existed nationally under the investment grants system against service industries. Incidentally, the Committee should not forget that we have halved S.E.T., on the way to removing it. The new system gives an additional incentive to manufacturing industry in development areas. This is a 100 per cent. free depreciation allowance which cannot possibly be described as discriminating against services.

Mr. Dell: Manufacturing industry in the development areas gets a 100 per cent. tax allowance while service industries get only 60 per cent. This discrimination—

Mr. Macmillan: The Labour Government gave nothing.

Mr. Dell: I appreciate what the hon. Gentleman is saying. I am merely asking why, as manufacturing gets 100 per cent. and services get 60 per cent., this discrimination against service industries exists?

Mr. Macmillan: I find it odd for the right hon. Gentleman to be accusing us of doing something less than we are doing in another respect when his Government did nothing at all. This is not discriminating against service industries. We have removed the discrimination nationally and given an additional incentive—[Interruption.] The right hon. Gentleman may not like it, but he did nothing.
The right hon. Gentleman asked about the provision of information and statistics under the new system. The Revenue is not able to publish statistics about tax allowances given in the development areas because many firms operate in both development areas and elsewhere. In preparing their accounts for tax purposes they are not required to separate out the allowances which arise in different localities.
I suppose that we could consider forcing people to provide this information, but I am against adding to the administrative burdens on industry. However, statistics relating to tax allowances generally are published in the National Income Blue Book and Inland Revenue statistics.
The right hon. Member for Birkenhead then questioned me about the E.E.C. He mentioned a contrast between the arrangements obtaining in the European Economic Community and those of the United Kingdom. There is a continuing discussion within the E.E.C. about the nature of regional investment incentives. Some members of the Community make use of grants, some do not. The Community has made no decision in favour of grants and against tax allowances, and the discussion within the E.E.C. on this subject does not affect the Government's decision in favour of tax allowances, which in the circumstances are right for this country.
The right hon. Gentleman said that Northern Ireland has not introduced tax allowances as Europe is not doing so. Europe has not yet decided. Northern Ireland has always been a law unto itself and a special case. Northern Ireland had always had grants under the previous system of investment allowances, and we decided to comply with precedent and not to make it revert; in other words, to allow it to continue as it had for some time.
The final question was about abuses. Under the investment grant scheme it was necessary to take action to prevent the benefit of the subsidy—the grant or subsidy, whatever one calls it—from being exported to foreign shipowners, in the example of the right hon. Gentleman, through subsidiaries set up here which qualified for grant. Clearly it is not possible for them to do that with a tax allowance. It was a system by which a

subsidiary was set up and the subsidy was paid to the subsidiary and went through to the foreign shipowner, although it was not used for the purposes for which it was paid. However, under the tax allowance system, to benefit from tax allowances there has to be a continuing profit coming forward in this country—not elsewhere—against which the allowances can be set. Also, the other condition is that allowances do not exceed the cost of a ship. Therefore, there is no element of subsidy, and this again is an additional safeguard.
The other side of the question was that of assets being moved out of development areas.

Mr. Dell: This is not merely a question of subsidiaries being set up in this country for the deliberate purpose of exploiting the investment grant system. These can be companies, perhaps foreign owned, operating here and making profits here against which tax allowances can be set but using those allowances, and the free depreciation they might gain, to build ships abroad which bring no benefit to the British balance of payments. What protection will there be against that circumstance?

Mr. Macmillan: The right hon. Gentleman is still thinking in terms of grants. With the allowances given there is nothing to export. There have to be profits against which the allowances can be set, and those allowances have to relate to expenditure which can be identified. There is no problem there. Perhaps we could discuss this in more detail at a later stage. We should discuss the whole question of assets moved out of development areas. This is dealt with in Clause 32(4), and perhaps we can leave this matter until we reach that Clause.
The hour is a little later than when we expected, perhaps, to reach this point of the debate, and I have tried to answer the specific questions. I am grateful to the right hon. Gentleman for putting them early, which made it a great deal easier for me to oheck that as far as possible I was getting my facts right and not in any way misleading him.
Having once more gone briefly through the arguments, I commend to the Committee the system of investment


allowances which this Clause will introduce into the Bill. Although this is rather off the point of the Clause, I would say that the Government are fully aware of the long-standing problem of the development areas and of the older industrial areas. It is a very deep rooted problem requiring a long-term effort. If time shows that there is a need to look again at the adequacy and effectiveness of the new measures, we shall be prepared to do so.
In addition, although admittedly this is rather wide of the real question, we seek constantly to lay greater emphasis in our programmes on what is now known as the infrastructure and the environmental side, to making some of the more unattractive areas more attractive to live in and work in, although this is not the immediate problem.
All that I can do is to commend the Clause to the Committee and express the hope that hon. Members will not find it necessary to divide against it.

Mr. Duffy: I will not detain the Committee for long, merely because, as the Chief Secretary has reminded us, there have been several debates on the question of investment grants versus investment allowances since the announcement last October of the impending change.
It is inevitable that some hon. Members should want to take this opportunity in the main debate on the Clause to examine the matter again. It must be plain to some hon. Members, in view of what the Chief Secretary has said, that the case against investment grants has not yet been made out. The Chief Secretary cannot easily wave away the news that my hon. Friend the Member for West Lothian (Mr. Dalyell) gave the Committee tonight, on grounds of cost inflation—not at this early stage. There is a real disquiet on the part of many hon. Members that the continued rise in unemployment will call for much more drastic measures than any that have been introduced so far.

Mr. Macmillan: I should not like in any way to deceive the Committee. It was not my judgment of what the cause at Plessey was. It was that of the firm. The judgment of firms about the effectiveness or otherwise of investment allowances has been quoted. If we are to believe firms which say that they have

been discouraged by the present system, we must also believe firms which say tha' it is not the present system but cost inflation which has caused the trouble.

Mr. Duffy: I am surprised that the Chief Secretary should have proffered that explanation quite so easily and in such a facile fashion and at such an early stage. It is not possible that a considered judgment could yet have been arrived at. It is not possible for us yet to reach a considered judgment on the question of investment grants versus investment allowances. I want now to look again at both sides of the argument and advance a new argument to justify the time I am taking up.
Given the escalation in the amount of public money which was being paid out in investment grants from 1967–68 down to the current year, involving a rise from £315 million to the current level of £600 million, it was inevitable that people should ask whether we were getting value for money. It must also be remembered that only six years ago evidence was mounting that financial managers were incapable of including in an investment appraisal incentives in the form of depreciation allowances. This seemed to be borne out by the now famous Richardson N.E.D.C. Report on the machine tool industry.
We all recall the arguments that were advanced in favour of the change. It was said that the grant system was something tangible for the business man and would have a repeating effect on investment, whereas allowances had an effect on investment which was easily obscured by bookkeeping entries; secondly, they could not possibly satisfy the urgent needs of recent years for corporate liquidity; thirdly, a high rate of depreciation was called for to maintain the financial attractiveness of the project to compensate for reductions in the rate at which tax was being relieved; and, finally, that this kind of funding prior to 1966 could be used for other purposes, such as window dressing.
11.15 p.m.
To what extent have these objections of only five years ago been removed? Is there any reason to suppose that British management understands the impact of initial and annual allowances better now than when they were originally introduced?
I recall, as the Chief Secretary did, the major arguments put forward in Cmnd. 4516, and especially the three reasons given in paragraph 2 following the statement:
In the Government's view the investment grants scheme has involved a high public expenditure cost without achieving its objectives. Moreover it has serious specific disadvantages.
The first argument was this:
Investment grants benefit firms whether or not they are making profits and they can therefore result in uneconomic investment leading to waste of resources.
My reply to that contention is that it is not existing investment and its profitability but incentive to undertake new investment which matters. What of the stimulus to get out of loss-making positions? There is no evidence that past profitability is positively correlated with future profitability. Therefore, I do not accept that first contention.
What of the second contention, which is:
The scheme discriminates unjustifiably against the service industries which make an important contribution to economic growth and to the balance of payments.
This statement is equally misleading, and I hope that the Committee will not easily accept it without subjecting it to the greatest scrutiny. It is not the cash grant system which discriminates, but the way in which its provisions were selectively applied. These discriminatory elements could have been removed from the system prior to last October and the cash grants, if need be, retained. Therefore, this is not an argument against cash grants.
The third contention is:
The discriminatory nature of the scheme and the detailed information required to support claims for grants have imposed a considerable administrative burden and cost on industry. Moreover, administration of the scheme by Government requires a staff of about 1,000 at an annual cost of over £2 million.
Does the Chief Secretary wish us to accept that there is no way of easing or simplifying this administrative burden, that there were no administrative measures which could have been introduced, that a transfer could not have been effected from the Department of Trade and Industry to the Inland Revenue, or that this could not have been treated as a negative tax?
The final sentence of paragraph 10 of Cmnd. 4516 which deals with development areas reads:
The cost of the regional differential in this form has been unduly high in relation to the benefit provided.
I am sorry that I did not get the chance to speak before the Chief Secretary because I wanted to ask him what his evidence is to support this contention.

Mr. John Wilkinson: I want in a few curt, brief sentences—[HON. MEMBERS: "Hear, hear."]—which have been inspired by the interventions of the hon. Members for Gateshead, West (Mr. Horam) and Sheffield, Attercliffe (Mr. Duffy), to say a few blunt things about investment allowances as opposed to grants and the regional incentives which we as a Government are introducing relevant to this Clause.
The hon. Member for Gateshead, West, in his delightful academic way, said that growth was not profit-related. That sort of statement would go down pretty hard in Bradford, where we earned more Queen's Awards for Industry this year than any city in the United Kingdom except London, without a single incentive except the incentive of profit. We are not an intermediate area nor a development area.
The hon. Gentleman also said that it was a jolly good thing that textile concerns should be lured away from the traditional areas to the far reaches of the kingdom, such as Barrow-in-Furness, where Listers in my constituency was lured, and the North-East, where Courtaulds has expanded. This is not a healthy thing. Unemployment among the male work force in my city is now 5.4 per cent. In my city, where we have traditionally earned good profits, we welcome the greatly reduced differential in regional incentive that my hon. Friend the former Member for Halifax, the Chief Secretary, is introducing.
It is not healthy to lure an industry that has been based in a particular area for very good reasons, whore the infrastructure and the training and development of the work force has been such that it is carried on exceedingly efficiently, to more remote parts of the kingdom just because of the grossly over-exaggerated differential preferences in the development areas. I welcome the Clause for that reason.
Until I heard the hon. Member for Gateshead, West I had not heard such nonsense as when the hon. Member for West Lothian (Mr. Dalyell) talked about the high-technology industries. He said that they should not be profit-related. What utter rubbish, a few weeks after the collapse of Rolls-Royce! That sort of thing said by Labour hon. Members is something they should put far down their pipes and smoke.

Mr. Taverne: The hon. Member for Bradford, West (Mr. Wilkinson) has welcomed the fact that there are now reduced differentials in the development areas. The Front Bench he seeks to support has stoutly maintained that, taking into account all the different measures, the differential has not been reduced. In future he should acquaint himself rather more with the Front Bench position he is seeking to support.
The debate has centred around the other side of the coin from the debate on the abolition of investment grants a fortnight ago. Neither then nor now have many of the detailed points from this side been adequately answered.
My first point relates to the need for stability. There have been several changes in the past in investment incentives. While we could not be entirely free from blame, there is no doubt that businessmen found it difficult to plan far ahead. This was recognised by the previous Government, which is why the regional employment premium was announced for a period of seven years. It had to exist for a period to have its full effect. Its abolition has been one of the reasons why the picture in the regions is so much worse than it was.
Now a further change has been introduced. The result has been brought home to everyone by the dismal picture of investment intentions, as was shown in the last Financial Times survey. In the few days that followed the Budget there was an upturn in the expectations of future investment. The expectations for the four-month moving average were optimistic after the Budget. Now, however, the four-month moving average has turned downward pretty sharply. The drop must have been quite serious to lead to that downward trend. If we enter the Common Market, it is extremely likely

that we shall have to change back yet again.
In their arguments on corporation tax, hon. Members opposite dismiss the views of the Commission and the support shown by the report of Professor van den Tempel, because they say "Look at the balance of power in the Common Market" The "big boys", France and Germany, have systems incompatible with van den Tempel, but five out of six Community members go for grants rather than allowances. Therefore, if we join the Common Market it means that the whole of the investment scheme will have to be overhauled once again. This would have a disastrous effect on investment and is a monstrous way to proceed.
The Chief Secretary challenged what had been done before and said that it did not achieve results in relation to the amount involved. Measures which at the time are regarded to be of limited effectiveness often prove to be successful after they have come to an end. This was found to be the case with the import surcharge. We have to admit that when the statutory incomes policy came to an end and was phased out, this was a factor which led, before the transition to the voluntary incomes policy, to an increase in wage claims. Exactly the same is happening with investment grants. We see a rapid worsening of the employment situation in the regions, a rapid worsening of investment intentions, and if it had not been for regional incentives the position would have been very much worse.
The whole of the philosophy behind the tax allowance approach is essentially the same as the "lame ducks" philosophy espoused by hon. Members opposite. It is a basic philosophy that those who go to the wall are necessarily the least worthy. This is not the case. This is why Europe has turned in favour of the idea of competition, in favour of those who can provide something new and giving them the same advantage as those who are already established.

Mr. Peter Rees: Would the hon. and learned Gentleman explain why his Government, along with a system of investment grants, perpetuated a system of capital allowances?

11.30 p.m.

Mr. Taverne: Because the grant system gave the opportunities to a firm


to seek to achieve a level of profitability other than that which it had already reached. What it comes to is that the tax allowance system is less advantageous for new expansion. It is less advantageous for expanding firms which have yet to achieve a new level of prosperity. It is less advantageous for the foreign companies which were attracted in particular to the development areas by the incentives given under the grant system. They had the advantage of an immediate cash grant, which benefited them more than tax allowances when it would be some years before their investment would pay off.
It means that new mineral exploitation, for which great opportunities exist, will be nothing like as advantageously placed as under the old system of investment grants. This is a major factor in the future prosperity of certain regions, and it is a major disadvantage which has now been placed in the way of that kind of expansion. We therefore reject the system which this part of the Finance Bill partly represents. That is why we voted against abolition of investment grants a fortnight ago. If the grants have been abolished, then at any rate some sort of allowance ought to exist, and so, while we oppose the whole of the new system, we will not vote against the allowances represented in this part of the Bill.

Question put and agreed to.

Clause 30 ordered to stand part of the Bill.

To report Progress and ask leave to sit again.—[Mr. Maurice Macmillan.]

Committee report Progress; to sit again tomorrow.

Orders of the Day — PORTOBELLO POWER STATION (FUELLING)

Motion made, and Question proposed, That this House do now adjourn.—[Mr. Clegg.]

11.33 p.m.

Mr. Gavin Strang: It is now approximately 18 months since the South of Scotland Electricity Board applied to the Government for permission to convert Portobello power station to oil firing. I understand that the Board is anxious that the Government should take this decision in the near future so that it may introduce the conversion before the winter and replace coal with oil this winter. I have discussed this matter with the representatives of the South of Scotland Electricity Board, the National Coal Board and the National Union of Mineworkers, and I must say at the outset that the Secretary of State would not be justified in allowing this conversion to go ahead.
With the present level of unemployment in the Edinburgh area, it is quite unthinkable that the Secretary of State should allow this to happen. The Electricity Board listed three reasons to me why it wants this conversion. First was the question of pollution and the fact that the power station is emitting grit—something which was drawn to the Board's attention by the Alkali Inspector. There are three points to make in reply to that. First, the Board now accepts that the emission is not a problem at present. This is a reflection of the fact that it is now getting a better quality coal. The manager of the power station said to me on Friday that he had not had any recent complaints from the Alkali Inspector. Secondly, the Board could put in a dust arrester to reduce the problem if it was that serious. The Board says that it is not possible to justify the expense of doing that. That is the argument everyone uses. Of course it will be expensive, but not so expensive as converting the power station. The Board accepts that this is not the main reason. I am listing the three reasons given to me in the order of importance. I do not intend to refer to this again because it is not the decisive consideration.
The second reason the Board put to me was that it was concerned about the quality of coal being supplied by the Electricity Board. Portobello is an old power station, and there are problems with ash fusion in the boilers which leads to agglutination. The coal must meet precise specifications. In the past the Coal Board has let Portobello down in this respect, but this has been overcome. The Coal Board spent a great deal of time making sure that it could meet the specifications for Portobello power station. Management and workers at the power station assured me on Friday that the coal they are using at present meets the specification and they have no problems.
The Electricity Board has made the point that while the Coal Board may have some coal of this quality it will not be able to supply it in sufficient quantity. The Board made a detailed examination of its pits in Scotland and has given the South of Scotland Electricity Board an unqualified assurance that it will meet the coal demand both in quality and quantity. The Coal Board should be given a chance to prove that it can do this.
The third reason—and this was the important one—which the Board gave for wanting this conversion was that it could produce electricity more cheaply from oil. Some of the savings would be operational. The figure given by the Board was £150,000, the bulk of which would be in labour. At least 70 men at that power station, which employs 250, will be redundant before the end of the year if this plan goes through The conversion will cost £1·8 million, and much more than £150,000 must be got out of it before it can be justified.
The Board's view is that the big saving will arise from oil being cheaper than coal for the production of electricity. When I asked the Board what its assumptions were as to the likely movements in the price of oil, the reply was that the differential would stay much the same in the next few years. I find this surprising in view of articles I have seen in the Financial Times, The Sunday Times and other quality newspapers, which are in flat contradiction to that assertion.
We are now in a completely new position. The market has changed. There is no longer an abundance of oil but a shortage. Not only is there a danger that we may not receive adequate supplies, but the oil suppliers, realising their new market power, are using it to force up the price. They have done so already this year, and the view of the articles I have mentioned is that this would continue to happen. It is surprising that the Board should say that it did not expect any change in the relative costs of oil and coal.
Those are the three points which were made, but in discussion the question of flexibility was mentioned. The Board wanted to be not totally dependent on coal. The Board has already converted Braehead and Dalmarnock, and in 1975 Inverkip oil power station will be in operation, so it cannot maintain that it has been forced to be totally dependent on coal.
The South of Scotland Electricity Board obviously takes into account only commercial consideration. This is a single tender contract, and I am not convinced that there should be only a single tender. I have never seen a detailed case for conversion. I have seen no figures of the price of oil or what precise assumptions have been made about depreciation and many other factors. If the Minister has such detailed information I would ask to see it. Here a nationalised industry is taking a major decision, and the public should be able to see the figures.
I find the commercial arguments unconvincing. I cannot accept the assumptions made about the likely cost of oil. But it is not commercial considerations which matter. This is a decision of the Government. It is their responsibility to take into account broader, economic considerations. They accept this. They would not have discussed it with the Scottish T.U.C. if they had not taken this aspect into consideration.
The first aspect is that of the balance of payments. According to an answer I was given recently in the House, the effect on the balance of payments will be minimal. In that context, it may be minimal but I hope that it will not be said that this was a factor taken into consideration, because that is a different matter. If one


applies that argument, one can say that cost-saving in this case is minimal because in the context of total electricity production the effect on unit costs will be minimal. I am not, of course, saying that the cost of production from this power station seems not to be affected. It is affected, just as there is an effect on the balance of payments.
The Government have the responsibility of making sure that the nation makes the maximum use of its indigenous resources. We have the coal for the power station; we have the equipment in the mines, and we have the miners. We have a responsibility to use them. If we do not use them, then pits will close and miners will be made redundant, for it is not a question of these resources being able to be deployed elsewhere.
The Government have responsibility for the morale in nationalised industries. The National Coal Board has made tremendous advances in the last few months; in Scotland it has done even better than the national average. In the South of Scotland last April output per man shift was 38·7 cwt. compared with 35·9 in April, 1970—an increase of 8 per cent.—while the fall in absenteeism was 9 per cent. We have seen spectacular advances in the Scottish coalfield in recent months. For the first time the miners have confidence in the future. If the Government give permission for this conversion to go ahead, they will destroy the morale of the Scottish miners.
The main point is the social question of unemployment. Male unemployment in Britain is the highest of any advanced industrial country. In the United Kingdom it is 4·6 per cent. but in Scotland it is 7·5 per cent. In Edinburgh and the Lothians, where these closures would take place, it is already 7 per cent., and it will be higher next year. If this conversion goes ahead, pits will be closed, because coal stocks are now rising. Last winter, coal was diverted from Scotland to England. Stocks are rising now, the economy is stagnating and industrial demand for coal is not increasing. Pits in the Lothians are fully manned. There is no doubt that if this conversion goes ahead at least 1,200 miners will lose their jobs in addition to the 70 workers at the power station who will lose theirs.
If the Government are really concerned about unemployment in Scotland

—I am not saying that they are not—they cannot possibly take a decision which will put at least 1,200 men on the dole. We do not know exactly how many because once it has spent £1,800,000 at Portobello the South of Scotland Electricity Board may be inclined to consider converting the power station at Cockenzie, in which case the demand for coal will be even less. But we know that we are talking of 1,200 jobs, and if the Secretary of State is really concerned about the present level of unemployment in Scotland, he cannot justify a decision that means over 1,000 additional families on the dole this coming winter. He cannot possibly justify this conversion at the present time.

11.45 p.m.

Mr. Alex Eadie: I must congratulate my hon. Friend the Member for Edinburgh, East (Mr. Strang) on initiating this debate. It is probably one of the better types of debate, in the sense that the Minister has stated that he has not made up his mind, which means that the dialogue continues. My hon. Friend and I hope that, as a result of our arguments, what some miners have described as "this madness" will not take place.
I am sure that the Under-Secretary will accept that I am not making a party political point. I was always critical of the policy pursued by my own Government towards the coal industry, and I hope that it will not sound arrogant if I say that many of the speeches that my hon. Friends and I made from the benches opposite about the coal industry have turned out to be true.
My hon. Friend has made a powerful case. Following mass closures and the activities of the "Knock the coal industry" brigade, there was a crisis of morale in the industry. Fortunately, this has levelled out, and we are beginning to inject new confidence. If such a decision were made, 1,200 or 1,300 miners would find themselves redundant, and morale in the Scottish mining industry would again suffer a severe blow. I remind the House, too, that earlier drastic redundancies took place in an atmosphere of comparative peace.
My hon. Friend made the telling point that we now face a new situation. We are now in a buyer's market for oil. Prices have been escalating. Oil is not


an indigenous resource, but coal is, and in various periodicals we read how countries all over the world are trying to conserve and preserve their indigenous energy resources.
Since oil is not indigenous to this country yet, it is absolute madness to put ourselves at the mercy of the tremendous escalation in prices. Even today in the Evening Standard the headline is:
Oil men forced to look again at prices.
If the argument for this conversion is on price, I am afraid that it falls flat.
More important, a breach of trust is involved in this proposal. On 5th August, 1969, when the decision was taken to have the new Inverkip power station fuelled by oil, the S.S.E.B. issued a statement. Incidentally, there must be doubts now about the ability to get oil at the right price for the station when it comes into operation. But a clear understanding was given by the S.S.E.B., of which the hon. Gentleman must be aware, that there would be produced in Scotland something in the region of 8 million tons of coal for the 1970s, compared with the then figure of 6 million tons. I suggest that there has been a breach of that understanding when the S.S.E.B. comes forward with its dastardly proposal which will result in misery for power station workers and miners alike.
The evidence of the effect of escalating oil prices is fairly substantial. Recently we debated the Coal Bill. I came into possession of an extract from a letter from a steel company pointing out the tremendous escalation in oil prices that had occurred since January, 1971. The figures that I obtained were to the effect that the price had increased by 47 per cent which placed the steel company in a serious financial position, since it meant an increase of £570,000 per annum in its fuel and energy bill. Since I got this document, there have been further increases in the price of oil. We know that in Libya and in Nigeria other increases in the price of oil will be coming forward.
The "knock the coal industry" brigade tried to reduce the price of oil. The price of oil, since July, 1970, has gone up by £5·50. The equivalent coal price has gone up by about £3·30 per ton. In the same period the price of electricity coal has gone up by £1·35. This

is a clear indication that there is greater stability in coal prices. The main point is that we are dealing with an indigenous resource.
I suggest to the Minister, since he has admitted that he has not yet made up his mind, that, on price alone, a decision to convert the Portobello power station to oil is not in the interests of this country, still less in the interests of the miners.

11.51 p.m.

The Under-Secretary of State for Development, Scottish Office (Mr. George Younger): I should like to congratulate the hon. Member for Edinburgh, East (Mr. Strang) not only on his good fortune in securing the debate but on the way in which he has presented his case. It was an extremely comprehensive and well balanced presentation. I very much appreciated it.
I should like to start by confirming yet again that no decision has been taken on this very difficult matter which is before my right hon. Friend at this time. Therefore, this Adjournment debate is very timely in that we have the benefit not only of the various other bodies which I shall mention which we have consulted but the views expressed by the hon. Gentleman and his hon. Friend the Member for Midlothian (Mr. Eadie), who can always be relied upon to put his view most clearly and carefully on this subject.
As I indicated last July during a debate initiated by the hon. Member for Fife, West (Mr. William Hamilton) on the general topic of fuelling of power stations in Scotland, the Secretary of State's policy is to give the most careful detailed consideration to all the factors involved. The hon. Gentleman said, quite rightly, that the Secretary of State's function is to take the broadest view of all the factors involved, including social and all other factors affecting the consumers, the coal industry, the electricity industry and the public at large. This is being done in this case before any decisions are arrived at on conversion.
The Secretary of State affirmed that there would be full consideration of the social consequences in reply to a Question by the hon. Member for Fife, West last November and by the hon. Member for Clackmannan and East Stirlingshire (Mr. Douglas) last July. The Portobello case, which concerns an application originally made in February, 1970, which


was before I had the responsibilities which I have now, is being handled in this manner and according to the way in which the Secretary of State has always said that he will handle these matters.
I therefore wrote to the Regional Chairman of the National Coal Board in December indicating that the Secretary of State had before him an application from the S.S.E.B. for approval to the conversion of Portobello power station, and asking for the Board's observations, including its views on any likely social implications of the conversion. I wrote in similar terms to the National Union of Mineworkers in Scotland and sent a copy of the letter to the Scottish T.U.C.
Both the N.C.B. and the N.U.M. expressed their opposition to any conversion, and, following further letters, I recently held detailed discussions with the N.C.B. in Scotland and later with representatives of the N.U.M. and the Scottish T.U.C. At these meetings, which were most useful and held in a frank and cordial atmosphere, the N.C.B. and the unions provided detailed information in support of their case against the conversion of the station on both coal supply and quality and social grounds, and this information is at present being carefully evaluated by the Secretary of State in consultation with the Secretary of State for Trade and Industry as the Minister responsible for the coal industry.
That is the stage reached. I hope that hon. Members will agree that there has been a full collection of views. We express our gratitude for the time and trouble which all concerned have taken to ensure that the maximum information is available before these decisions are taken.
The hon. Member said that he has recently visited the power station to see for himself. One gets a picture of what goes on there, but the real decision must be based on an assessment of wider factors. Of course, the relativity between coal and oil prices is a relevant consideration. I appreciate that it is very difficult to see what future trends will be, and it is more difficult now with oil than it was some months ago, following the events of the last few months.
But, to be fair to both sides, the Electricity Board is a considerable user

of both coal and oil and, rightly or wrongly, does not agree that oil has now become nearly the same price as coal. It maintains its considered view that conversion to oil has economic advantages for consumers and that it will also introduce an element of flexibility into a system too heavily dependent on coal.
I am not supporting those views, but as we have recorded the view of the coal industry and the unions, I am duty bound to record those of the Board, which are to some extent supported by the views of the Electricity Consultative Council. They cannot lightly be set aside.
The hon. Member mentioned the future use of Portobello. It is true that it does not follow that if conversion does not take place the station will continue at the same intensity of use as in previous years, so there is another element in the equation. If, through remaining on coal, it were to become less attractive in what is called the merit order, it is possible that the station would not continue at the same level as in previous years.
We will take carefully into account the fact that there is not a pollution problem in the neighbourhood, but there has been some misunderstanding on one point. The pollution consideration cannot be ignored by my right hon. Friend, however small or great its effect. He has a statutory responsibility for clean air. But I accept that the hon. Gentleman does not think that there is much of a problem at the moment.
There has been considerable discussion about quality, but it is difficult for me to give a precise view because this involves the opinions of a number of people at various levels. I understand that the N.C.B. is doing everything in its power to achieve the level of quality desired by the Electricity Board, and there is, I believe, some evidence of improvement.
In the last two years there have been a number of occasions when the quality has been far from good enough, so much so that there have had to be interruptions in supply from the station. It is to be hoped that if it continues to be supplied by coal the N.C.B. will maintain the improvement in quality which I know it has been trying to achieve.
The question of achieving flexibility by using various types of fuel was raised. The Electricity Board considers that there is value in having some flexibility through, at this station, the use of oil rather than coal. This is a factor which we must take into account, but I would not like to say that it is a factor which is able to overlay all the other considerations that we must have.
I appreciate the questions that I was asked about unemployment among miners, but there is some doubt about the precise figure. It has been represented to us that the figure of 1,200 is very much larger than it would, in fact, be. Nevertheless, we must remember that there would undoubtedly be some redundancy, and this is a factor of considerable importance. The situation on this score is far from clear. We are endeavouring to obtain better information on this subject and about what the requirements will be nationally for coal

supplies next winter and in the winters following that.
Last winter coal supplies were by no means luxuriously plentiful, and it was a mild winter. We in Scotland were, therefore, able to help out by supplying a considerable amount of coal south of the Border. It does not necessarily follow that if conversion took place at Portobello, the coal displaced there would not have a market. If conditions in the coming winter and the winters after that —remembering that the weather last winter was very mild—are hard, it is by no means clearly established that there would not be a need—

The Question having been proposed after Ten o'clock, and the debate having continued for half an hour, Mr. DEPUTY SPEAKER adjourned the House without Question put, pursuant to the Standing Order.

Adjourned at three minutes past Twelve o'clock.